Islamic contracts Classifications

Contract
Classification Detailed Description Examples
Type
Contracts categorized by structural
elements such as risk-sharing, asset
Characteristics ownership, type of consideration
(profit or charitable intent), and
agency nature.
Contracts involving the sale, lease,
Murabaha (cost-plus
or transfer of tangible goods or
Sale-Based financing), Ijarah
assets. The bank or seller takes on
Contracts (lease contracts), Salam
ownership risk, while the buyer
(advance purchase).
assumes payment responsibility.
In these profit-and-loss sharing
contracts, both parties share
Mudarabah (venture
Equity-Based financial risk and potential gains.
capital), Musharakah
Contracts Capital is combined for a common
(joint partnership).
business purpose, promoting mutual
responsibility and collaboration.
These contracts involve obligations
or guarantees that protect creditors Qard Hasan
Debt-Based and borrowers. They are designed to (benevolent loan),
Contracts provide credit without interest, Kafalah (third-party
typically for social welfare or risk guarantee).
mitigation.
Voluntary contracts based on
benevolent motives rather than
profit. They involve gifting or
Gratuitous Hibah (gift), Waqf
endowments, supporting charitable
Contracts (endowment).
objectives and family needs, often
providing ongoing community
benefit.
Contracts that use collateral or
pledges to secure obligations,
Security-
ensuring debt repayment. These Rahn (collateral),
Based
contracts ensure the lender’s ability Kafalah (guarantee).
Contracts
to recover funds if the borrower
defaults.
These contracts facilitate services Wakalah (agency),
Service based on agency or trust. Ju’ala (reward-based
Contracts Compensation depends on the task service), Amanah
and can be fixed or performance- (trust).

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 Contract
Classification Detailed Description Examples
Type
based, depending on results or tasks
completed.
Contracts classified based on their
economic or social goals,
Purpose and
distinguishing between profit-
Effect
seeking, social welfare, and
security-based contracts.
Contracts structured to generate
profit through trade, leasing, or Murabaha (asset
Commercial investments. They are used in asset financing), Mudarabah
Contracts acquisition, financing, and (investment
investment to enable business partnership).
growth.
Contracts for social purposes that
support charitable objectives and
Qard Hasan (interest-
Charitable benevolent financing. They are
free loan), Waqf
Contracts often designed to assist low-income
(perpetual charity fund).
individuals or social welfare
projects without seeking profit.
Contracts that provide financial
security or guarantee an obligation, Kafalah (third-party
Security
supporting commercial transactions guarantee), Rahn
Contracts
by enhancing trust and (collateral-backed loan).
creditworthiness.
Contracts facilitating representation
or agency, typically where one party Wakalah
Agency-
is empowered to act on behalf of (representation), Ju’ala
Based
another for specified transactions, (finders’ fee for service
Contracts
often seen in investment or trade results).
management.
Classification based on when the
Time of obligations within each contract are
Execution fulfilled (immediate, deferred, or
future-oriented).
These contracts are completed Murabaha (resale
immediately upon agreement, with immediately after
Spot
assets or funds delivered at once, purchase), Ijarah
Contracts
like in cash sales or on-the-spot (leasing on receipt of
leases. asset).
Deferred Contracts where delivery of goods Salam (advance
Contracts or services is delayed or occurs at a purchase for future

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 Contract
Classification Detailed Description Examples
Type
specific future time, often after delivery), Istisna
advance payment. (custom manufacturing
contract).
Contracts designed for long-term Waqf (endowment for
Future-
benefit, often with an enduring charity), Diminishing
Oriented
charitable impact or gradual Musharakah (gradual
Contracts
ownership transfer. home ownership).
Examines whether assets are
Physical
physically transferred immediately,
Possession
gradually, or at a future date.
Contracts where possession is Murabaha (buyer takes
handed over upon agreement. This ownership at purchase),
Immediate
applies in asset sales or gifts, whereHibah (recipient
Possession
the buyer or recipient immediately receives a gift
controls the asset. instantly).
Possession and transfer of assets Salam (deferred
Deferred occur at a future date, allowing the delivery), Istisna
Possession contract parties time to prepare, (custom manufacturing
manufacture, or deliver. or construction).
Diminishing
Ownership and control transfer
Musharakah (client
Gradual gradually over time, often allowing
purchases bank’s share
Possession a borrower or lessee to gain
over time), Ijarah
ownership in steps.
(leasing).
Classifies contracts based on their
impact on the broader economy,
Macro-Level
such as financing needs, investment
Classification
growth, social welfare, or credit
security.
Contracts that facilitate short-term
Murabaha (cost-plus
or long-term financing, essential for
Financing asset financing), Ijarah
businesses and consumers seeking
Contracts (leasing for asset
Shariah-compliant alternatives to
acquisition).
conventional loans.
Contracts that enable risk-sharing
Mudarabah (profit-
partnerships and encourage
sharing for startups),
Investment investment in productive sectors.
Musharakah (joint
Contracts These contracts promote economic
investment in
growth and support entrepreneurial
businesses).
projects.

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 Contract
Classification Detailed Description Examples
Type
Contracts focused on providing
social services, welfare, and support Qard Hasan (interest-
Social
to individuals and communities, free loan for education),
Welfare
especially the less privileged. They Waqf (endowment for
Contracts
offer Islamic alternatives to hospitals or schools).
conventional social programs.
These contracts provide stability to
Rahn (collateral-backed
financial transactions and increase
Security lending), Kafalah
trust between contracting parties by
Contracts (guarantee for loan
ensuring debt repayment or
repayment).
protecting assets.
Aspect Bilateral Contracts Unilateral Contracts

Obligations Both parties have obligations. Only one party is obligated to perform.

Typically reciprocal and involves Non-reciprocal, often gratuitous, or

Nature
exchange of value or services. voluntary.

Common Murabaha, Mudarabah,

Qard Hasan, Hibah, Waqf, Kafalah.
Examples Musharakah, Istisna, Ijarah.

Financing, trade, investment, Charity, social welfare, family support, loan

Typical Use Cases
leasing. guarantees.

Often non-binding or voluntary for the

Binding Nature Legally binding on both parties.
beneficiary.

Key Examples of Each Category:

1. Murabaha (Sale-Based/Spot Financing): A bank buys a property and resells it to a

customer at a profit, enabling them to make installment payments while taking immediate
ownership. Used in car financing, property acquisition, and asset-backed loans.
2. Ijarah (Sale-Based/Leasing): A bank leases machinery to a manufacturing company.
The bank retains ownership, while the company pays monthly rent, using the equipment
without incurring debt.
3. Salam (Deferred): A financier pays a farmer in advance for wheat to be delivered at
harvest. This supports agricultural financing without charging interest and enables the
farmer to access needed funds upfront.

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 4. Istisna (Manufacturing): A customer contracts a builder to construct a custom-designed
factory. Payments are staged, with possession transferred upon completion, commonly
used for real estate development and infrastructure projects.
5. Mudarabah (Investment): A wealthy investor provides capital to a tech entrepreneur.
Profits are shared based on a pre-agreed ratio, while losses are borne solely by the
investor, encouraging skill-based management without debt burden.
6. Musharakah (Equity-Based): A real estate project is jointly funded by a bank and a
developer. Both parties share profits or losses, fostering collaboration in a real investment
without incurring debt.
7. Qard Hasan (Social Welfare): A nonprofit gives an interest-free loan to an individual
for medical expenses, repayable only when the borrower is financially stable, embodying
social responsibility and charity in lending.
8. Waqf (Charitable Endowment): A philanthropist donates land for a hospital under
Waqf, generating ongoing charitable benefits from rental income or farming operations,
supporting community welfare.
9. Kafalah (Guarantee): A family member guarantees another’s loan for education,
agreeing to fulfill the obligation if the borrower defaults, thus enhancing access to funds
without incurring interest.
10. Rahn (Collateral): A borrower pledges their car as collateral for a business loan. If they
default, the lender has the right to sell the car, providing financial security to the lender
without charging interest.

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 Islamic contracts Classifications

Contract Mechanics & Typical Use

Category Purpose Examples
Type Principles Cases
The seller
discloses cost and
profit margin. The Example: A
buyer pays for the bank buys a car
asset at a markup, for $20,000 and Goods
Sale-Based Asset purchase
Murabaha usually in sells it to a financing,
Contracts and resale
installments. The customer for home loans
seller must own $25,000 payable
and bear risk of the in installments.
asset before sale to
the buyer.
A contract for
Example: A
items to be
developer
manufactured or
contracts a
constructed, with
builder to
specifications Real estate,
Manufacturing construct a
Istisna agreed in advance. infrastructure
or construction custom factory
Payment can be projects
and pays in
staged. The seller
stages as
completes and
milestones are
delivers the asset
met.
on schedule.
Buyer pays fully in
advance for goods Example: A
delivered at a later farmer receives
Agriculture,
Advance date. Used mainly $10,000 upfront
Salam raw materials
purchase in agriculture, with to deliver 50
trading
standardized goods tons of wheat at
to avoid harvest.
ambiguity.
The bank buys an
asset and leases it
Example: A
out, charging a
bank buys a
fixed rent. The
piece of Equipment
lessee has usage
Ijarah Leasing machinery and leasing, car
rights but no
leases it to a financing
ownership unless
factory for
agreed. The lessor
$1,000 monthly.
bears ownership
risks.

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 Contract Mechanics & Typical Use
Category Purpose Examples
Type Principles Cases
Investor provides
capital, while the
Example: A
other partner
venture
provides expertise.
capitalist funds a
Equity- Profits shared per Investment
Investment startup, and
Based Mudarabah agreement; losses funds,
partnership profits are split
Contracts borne by investor startups
60-40 between
only. Manager
investor and
(mudarib) has
founder.
decision-making
authority.
Both parties
contribute capital
and share Example: A
profit/loss. bank and client
Diminishing jointly purchase Real estate,
Musharakah Joint venture Musharakah a home, with the project
allows one partner client gradually financing
to buy out the buying the
other’s share bank’s share.
gradually, like in
home financing.
A principal
appoints an agent
Example: An
for a specific task
investor
or transaction. The
Agency- appoints an Investment
agent may receive
Based Wakalah Representation agent to manage management,
a fee. The agent
Contracts their portfolio trading
must act within
for an agreed
specified limits
fee.
and report
activities.
A benevolent loan Example: A
given without charitable
interest or profit. organization
Loan- Social
Interest-free The borrower lends a student
Based Qard Hasan welfare,
loan repays the $5,000 for
Contracts microfinance
principal, typically education,
for social or repayable
charitable reasons. without interest.
Voluntary gift Example: A
Gratuitous Family
Hibah Gift where no return is father gifts his
Contracts support,
expected. Often child a house

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 Contract Mechanics & Typical Use
Category Purpose Examples
Type Principles Cases
used to support without charitable
family, charitable expecting donations
causes, or repayment.
inheritance without
strings attached.
A permanent
donation where
income from the Example: A
asset is used for philanthropist
Charitable
charity. The asset donates land as
Waqf Endowment causes, public
(e.g., land) itself is waqf to generate
facilities
not sold and is income for a
managed by hospital.
trustees per
donor’s intent.
A third party
Example: A
guarantees the debt
family member
of another. If the Loan
guarantees a
Guarantee debtor defaults, the guarantees,
Kafalah Guarantee student loan,
Contracts guarantor assumes credit
promising
responsibility. enhancement
repayment if the
Used for loans or
student defaults.
credit transactions.
Asset is pledged as
Example: A
security for a debt. Secured
Security- person takes a
Collateral The lender holds loans, asset-
Based Rahn loan and pledges
(pledge) the collateral and backed
Contracts their gold as
may sell it if the financing
collateral.
borrower defaults.
A trustee receives
and safeguards
Example: A
property for
bank holds a
Agency- another party, with Asset
Trust-based customer’s
Trust Amanah an obligation to custody, safe
contract valuables in a
Contracts return it upon storage
safety deposit
request. Common
box.
in custodial or
fiduciary roles.
One party Example: A Finder
Fee-Based Reward-based promises a reward company offers services,
Ju'ala
Services service for completing a a $5,000 reward brokerage,
specific task or to a recruiter recruitment

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 Contract Mechanics & Typical Use
Category Purpose Examples
Type Principles Cases
result. Payment who
depends on successfully
achieving the finds them a
agreed outcome, qualified
often in brokerage candidate.
or recruitment.

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