The definition the basic elements of a sale contract are briefly explained in the previous article. This article will discuss the different categories of sale contracts. Classification of sale contracts is mainly based on the legal purposes of the contract
Every contract has a different nature and legal effects, such as the transfer of ownership, risk-taking, and profit distribution. When these contracts are different from each other in nature and legal purpose, they have different requirements and conditions which should be met in order to make the contract valid according to the Shariah.
Broadly, contracts can be classified by the type of goods exchanged, by the method of payment, and by other methods such as disclosure of the profit.
Types of Goods Exchanged
Barter trading (Bay al-Muqayadah)
In this type of sale, one commodity is exchanged for another commodity. This type of sale was very common in the early period of human history. Although, it’s permissible, Shariah doesn’t encourage this type of sale in order to avoid any element of unfairness in the exchange of goods.
Exchange Sale (Bay Al-Sarf)
In this type of sale, one monetary form is exchanged for another in the same or different category. This includes gold for gold, silver for silver, gold for silver, and currency sale with same or different type. The general conditions for this type of sale is that both counter values must be equal in amount if there is exchange of the same type. And the contracting parties should take possession of counter values before they disperse.
General Sale (Bay Al-Mutlaq)
This is the most commonly used and preferred mode of sale. It was developed due to various issues in barter trading system. We can determine the price of goods fairly and easily in this mode of sale. Therefore, it’s encouraged by Shariah.
Classification by Mode of Payment
This form is most common in our daily business activities. Payment is made in full at the time of the sale. For example, if you pay cash when you buy your groceries, this can be considered a spot sale.
Deferred Payment Sale (BBA)
In this sale, payment is deferred over a period of time. An important condition for this type of sale is that price must be fixed at the time of contract and there should not be any additional charges on late payment.
This is a type of sale where the payment is fully made in advance and the commodity will be delivered later. This is an exceptional sale in Shariah which is basically used for agriculture financing to fulfills the needs of poor farmers. The main condition for this sale is to determine the subject matter (commodity) properly. So, there would be no possibility of dispute among the parties at the time of delivery.
Bargaining sale (Bay al-Musawamah)
In this type of sale, property is sold for mutually agreed price without any reference to the cost price and profit. In other words, this sale is based on bargain and agreement of the parties and the seller is not obliged to disclose his cost price and profit.
Trust sale (Bay al-Amanah)
In this type of sale, the seller must disclose the cost price and the intended profit. This sale is called bay al-amanah - or a trust sale - because the buyer trusts the seller with regard to actual cost price and profit. This trust sale is further divided into three types:
1. Murabaha (mark-up sale): In this type of sale, the commodity is sold for a given price plus a certain profit margin with agreement of the buyer and the seller.
2. Tawliyyah: In this type of sale, the price is set equal to the original acquisition cost without any profit.
3. Wadhi’ah: In this type of sale, the seller sells his commodity below the cost price or at a discounted price.
In the next article, we'll learn more about these contracts in their application for Islamic finance.