STANDARDISATION OF NOTATION IN ISLAMIC ECONOMICS, BANKING & FINANCE

In the August 2016 issue of ISFIRE, we started with a one-pager to introduce standardisation of notation in Islamic economics, banking and finance (IEBF). This has emerged as a major project since then, as a number of universities engaged in in the instruction of IEBF have started to adopt what were initially named as ISFIRE Notes, and
subsequently renamed as Cambridge Notes. So far, we have issued 9 Cambridge Notes:
• Cambridge Note 1 on Bai’(issued in February 2018)
• Cambridge Note 2 on Riba (issued in June 2018)
• Cambridge Note 3 on Murabaha (issued in August 2016)
• Cambridge Note 4 on Salam (issued in October 2016)
• Cambridge Note 5 on Mudaraba (issued in December 2016)
• Cambridge Note 6 on Ijara (issued in February 2017)
• Cambridge Note 7 on Musharaka (issued in February 2018)
• Cambridge Note 8 on Istisna’ (issued in April 2018)
• Cambridge Note 9 on Sukuk(issued in June 2019)
In this issue of ISFIRE, we issue Cambridge Note 10 on Wa’ad.

WHY IS THERE A NEED FOR STANDARDISATION OF NOTATION IN ISLAMIC FINANCIAL EDUCATION?

There is no standard notation in the books written
on Islamic economics and finance. In the absence
of a standard, authors use their discretion to
notate different Islamic financial contracts. This
has not only created pedagogical confusion but has also hampered true understanding of Islamic
financial contracts.
We believe that standardisation of notation will
help develop consistent pedagogical tools to be
used for education and training in IEBF. Once
Cambridge IIF has issued a sufficient number
of notes, we aim to hold a special workshop on
Standardisation of Notation in IEBF to finalise
all these notes into standards. In this respect a
Board on Standardisation of Notation in Islamic
Economics, Banking and Finance is under
formation. The interested individuals are invited to
submit their expressions of interests to Professor
Humayon Dar by emailing on hdar@cambridge-iif.com.

Cambridge Note 1 on Bai’

1. (A.X.B; P) represents a spot sale contract
   between A (seller) and B (buyer) to buy/sell a
   commodity X for the price P. Both the object
   of sale, X, and price, P, must be exchanged
   on spot. A variant of this contract may be
   notated as (A.X.B; P|T0), explicitly mentioning
   the time, T0, when the exchange of object of
   sale and its price be affected.
2. (A.X.B; P|T1, T0) represents a sale contract
   between A (seller) and B (buyer) to buy/sell a
   commodity X for the deferred price P|T1 to be
   paid by B at a later time T1, allowing the buyer
   to receive the commodity upfront at time T0.
   2a. (A.X.B; P|T1, T0) is essentially bai’ mu’ajjal or
   what is also known as bai’ bithaman ‘aajil, or a
   deferred payment sale contact.
3. (A.X.B; P|T0, T1) represents a sale contract
   between A (seller) and B (buyer) to buy/sell a
   commodity X for the a price P|T0 to be paid
   upfront by B at time T0, allowing the seller to
   deliver the commodity during time period T or
   on a specific date at the end of T1.

3a. (A.X.B; P|T0, T1) is essentially a salam contract as per
Cambridge Note 3 on Salam.

Cambridge Note 2 on Riba

1. (A.X.B) represents an (unconsidered) exchange of an
   asset X between two parties, A and B, whereby A
   transfers ownership of X to B, without any reference to
   a consideration or price. This may also be known as an
   exchange of gift.
2. (A.X.B; B.X.A) represents exchange of an asset X between A
   and B, whereby A transfers ownership of (an amount of) X
   to B, while B also simultaneously transfers ownership of (an
   amount of) X to A.
3. (A.X.B; B.X.A |T0, T1) represents exchange of an asset X
   between A and B, whereby A transfers ownership of (an
   amount of) X to B at time T0, and B transfers ownership of
   (an amount of) X to A at time T1.
4. (A.X1,B; B.X2.A) represents exchange of an asset X between
   A and B, whereby A transfers ownership of an amount X1 of
   X to B, while B also simultaneously transfers and amount X2
   of X to A; such that X1 = X2 or X1 ≠ X2.
5. (A.X1,B; B.X2.A) is an agreement between two independent
   parties, A and B, which may lead to riba if A transfers
   ownership of an amount X1 of X to B who also transfers and
   amount X2 of X to A; such that X1 ≠ X2.
6. (A.X1,B; B.X2.A |T0) is an agreement between two
   independent parties, A and B, which may lead to riba if A
   transfers ownership of an amount X1 of X to B who also
   simultaneously (at time T0) transfers and amount X2 of X to
   A; such that X1 ≠ X2.
7. (A.X1,B; B.X2.A |T0, T1) is an agreement between two
   independent parties, A and B, which may lead to riba if A
   transfers ownership of an amount X1 of X to B at time T0,
   and B transfers and amount X2 of X to A at another time T1;
   such that X1 ≠ X2.
8. (A.X1,B |B.X2.A |T0, T1) is definitely and unambiguously a riba
   agreement between two independent parties, A and B, if A
   transfers ownership of an amount X1 of X to B in exchange
   for B transferring and amount X2 of X to A, such that X1 ≠
   X2, irrespective of whether T0 = T1 or T0 ≠ T1.

Cambridge Note 3 on Murabaha

1. (A.X.B; PMUR ,∏MUR , T) represents a classical murabaha
   arrangement between A (seller) and B (buyer) to buy/sell a
   commodity X for the murabaha price PMUR and murabaha
   profit of ∏MUR for T as the date of payment of price.
2. (A.X[1].B; PMUR, ∏MUR, T) represents a commodity murabaha
   arrangement between A (financier) and B (financee) arranged
   by a single commodity broker 1; whereby PMUR is the
   murabaha price, ∏MUR is the murabaha profit, and T is the
   duration of the financing period (in years, months, or days,
   etc.).
3. (A.X[1.2]X.B; PMUR, ∏MUR, T) represents a commodity
   murabaha with two commodity brokers, 1 and 2.
4. (A.X[1].B; PMUR, ∏MUR, T, D(.), R(.)) represents a commodity
   murabaha arrangement between A (financier) and B
   (financee) arranged by a single commodity broker 1; whereby
   PMUR is the murabaha price, ∏MUR is the murabaha profit, and
   T is the duration of the financing period (in years, months, or
   days, etc.); D(.) and R(.) represent default and rebate clauses,
   respectively, such that:

Default Penalty = a Xi ; and
Rebate amount = b X

whereby Xi = amount outstanding at the time of default; Xj = amount outstanding at the time of early settlement date; and 0 ≤ a ≤ 1 and 0 ≤ b ≤ 1.

5. (A.X[1].B; PMUR, ∏MUR, PMURIK, T / N, PEX) represents a
   commodity murabaha based Islamic mezzanine financing
   arrangement between A (financier) and B (financee) arranged
   by a single commodity broker 1; whereby PMUR is the
   murabaha price, ∏MUR is the murabaha profit, PMURIK is the
   payment in kind (one-off balloon payment at the end of
   the financing period) and T is the duration of the financing
   period (in years, months, or days, etc.); N is the number of
   shares that B promises to sell to A in the event of default for
   an agreed price PEX.

Cambridge Note 4 on Salam

1. (A.X.B; PSAL|T0, T1) represents a classical salam contract
   between A (seller) and B (buyer) to buy/sell a commodity X
   for the salam price PSAL|T0 to be paid upfront by B at time
   T0, allowing the seller to deliver the commodity during time
   period T1 or on a specific date at the end of T.

1. ([A.X.B; PSAL1|T0], [B.X.C; PSAL2|T1], T2) represents a salamparallel-salam arrangement, involving three independent
   parties, A, B and C, whereby A sells a commodity X to B for a salam price, PSAL1|To , paid by B upfront at T0, to receive
   the delivery during time period T2 or on a specific date at
   the end of T2. The salam-parallel-salam arrangement also
   involves B selling the commodity X to another independent
   party C that pays salam price, PSAL2|T1, to B at the time
   of entering into the salam contract, i.e., at T1 ∀ T0 ≠ T1,
   to deliver the commodity X during time period T2 or on a
   specific date at the end of T2.
2. (A.X.B.X.C; PSAL1|Ti , PSAL2|Tj , T) represents a three-partite
   salam-parallel-salam contract, whereby A sells a commodity
   X to B for a salam price, PSAL1|Ti , paid by B upfront at Ti , and
   B sells on the commodity X to C for a salam price, PSAL2|Tj,whether Ti = Tj or Ti ≠ Tj ; the deliveries take place during
   time period T or on a specific date at the end of T. This is a
   null and void contract that does not fulfil the requirement of
   independence of the two salam transactions.

Cambridge Note 5 on Mudaraba

1. (A.K.B; ∏, α; -∏, 1; T) is a simple mudaraba contract between
   a Party A (capital provider) and a Party B (the managing
   party) in such a way that A receives α percentage of the
   profit, ∏, if any. K is the capital contribution (money) by A;
   while T is the mudaraba time period. In case of loss, i.e., -∏,
   A shall have to bear it with α = 1.
2. A.K.B; ∏0, α; ∏1, 0; -∏, 1; T) is a mudaraba contract that
   stipulates that the capital providing party (Party A) will
   receive α percentage of the profit if the realised profit is up
   to a threshold level of profit, ∏0; any profit over and above
   this threshold, i.e., ∏1, will be retained by the managing
   party, i.e., the share of A will be zero (0). However, in case of
   the loss, -∏, A shall have to bear it with α = 1.
3. If a mudaraba contract is notated with (A.K.B; α, T), it shall
   always be deemed as a short version of (A.K.B; ∏, α; -∏, 1;T).

Cambridge Note 6 on Ijara

1. (A, X, B; R = r1+ r2 + … + rt, T) represents a simple ijara
   contract between A (lessor) who leases an asset X to another
   person B (lessee) for a total rental value of R to be paid in
   instalments of r1, r2, …, rt , for a period of T.
2. (A, X, B; R = r1 + r2 + … + rt , T; P1, P2) represents an ijara
   wa iqtina’ contract between A (lessor) who leases an asset
   X to B (lessee) for a total rental value of R to be paid
   in installments of r1, r2, …, rt , for a period of T; with an
   understanding that B will have to buy the asset for a price,
   P1, should it happens to default on rental payment during the term of the lease, and if that (event of default) does not occur B will buy the asset X at the end of the lease period for a price, P2.

3. (A, Y, B; R = r1 + r2 +…+ r3 , T) represents an ijara mausufa
   dzimma contract between A (lessor) who leases an asset Y
   (which has yet to come into existence) for a total rental value
   of R to be paid in instalments of r1, r2, …, rt, for a period of T
   (which may coincide with the time that Y must take to come
   into existence).
4. If an ijara contracts is notated with (A, X, B; R, T), it shall
   be deemed as an ijara that requires a lump-sum amount of
   rental either at the start of the lease period or at the end of it.
5. An ijara contract notated with (A, X, B; R0, T) shall imply that
   the rental amount is required to be paid in lump- sum at the
   start of the lease period; and an ijara contract notated with
   (A, X, B; Rt, T) shall imply that the rental amount is required
   to be paid in lump-sum at a specific time in future, which
   may include the end of the lease period.

Cambridge Note 7 on Musharaka

1. (A.KA.KB.B, Π, α; -Π, βi ; T) is a musharaka contract between
   a Party A and a Party B whereby both parties contribute
   capital, KA and KB, respectively, to a venture, in such a way
   that A receives α percentage of the profit, Π, if any, and B
   therefore receives (1-α) percentage of the profit, Π. In case
   of loss, i.e., -Π, both parties shall bear loss in accordance
   withβi , whereby i = A or B; βA = KA/K and βB = KB/K, and K =
   KA + KB. T is the time period for musharaka; and α and β may differ.
2. (A.KA.KB.B, Π, βi ; T) is a simple musharaka contract between
   a Party A and a Party B whereby both parties contribute
   capital, KA and KB, respectively, to a venture, in such a way
   that A receives βA percentage of the profit, Π, whether
   positive or negative, and B receives βB percentage of the
   profit. In other words, β = α.
3. If a musharaka contract is notated with (A.KA.KB.B; α, β; T), it
   shall always be deemed as a short version of (A.KA.KB.B, Π, α; -Π, βi ; T).

Cambridge Note 8 on Istisna’

1. (A.X.B; P1|T1, P2 |T2, … Pn|Tn; ΡIST=∑ni=1 Ρi,Tn) represents an
   istisna’ contract between A (seller) and B (buyer) to buy/sell
   a commodity X (which may be manufactured by A during the
   contract period) for total price of PIST, payable in instalments
   P1, P2 , … Pn, until the time of the delivery Tn, by when the
   whole price must have been paid.
2. ([A.X.B; P1|T1, P2|T2, … Pn |Tn; ΡIST1=∑n i=1 Ρi ,Tn], [B.X.C; P1|T1, P2|T2, … Pn |Tm; ΡIST2=∑mj=1 Ρi,Tm) represents an istisna’-

parallel-istisna’ arrangement, involving three independent
parties, A, B and C, whereby A sells a commodity X to B for
price, PIST1, paid by B in instalments, to receive the delivery
on a specific date at the end of T. The istisna’-parallelistisna’ arrangement also involves B selling the commodity
X to another independent party C that pays price PIST2, to B in instalments ∀ i ≠ j and/or PIST2≥PIST1, to receive the
commodity X on a specific date at the end of T ∀ Tm≥Tn parallel-istisna’ arrangement, involving three independent
parties, A, B and C, whereby A sells a commodity X to B for price, PIST1, paid by B in instalments, to receive the delivery
on a specific date at the end of T. The istisna’-parallelistisna’ arrangement also involves B selling the commodity
X to another independent party C that pays price PIST2, to B in instalments ∀ i ≠ j and/or PIST2≥PIST1, to receive the
commodity X on a specific date at the end of T ∀ Tm≥Tn.

3. A short version of the istisna’ contract stated in (1) can be written as IST(A.X.B; ΡIST=∑ni=1 Ρi,Tn).
4. A short version of the istisna’-parallel-istisna’ arrangement stated in (2) can be written as (IST1(A.X.B; ΡIST1=∑ni=1 Ρi,Tn),IST2(A.X.B; ΡIST2=∑mj=1 Ρi,Tm).

Cambridge Note 9 on Sukuk

1. (A.X.B, C; N, α, Ρ|Ρ = αN; T, ti |i = 1,2,3,…n) is a sakk issued
   by an issuer A on asset to be bought by investors B,
   with a notional price of N. The return on the sakk will be
   determined by the net revenue Ρ, generated by the asset X
   by way of dealing with a party C. The issuer will ensure that
   Ρ is equivalent to an amount added to notional N in such
   a way that Ρ = αN ∀ 0>α>0. The sakk is issued for a time
   period T and the return may be distributed in instalments on
   dates ti. The notional N must be returned at the end of the sukuk period T.
2. (A.X.B, C; N, α, Ρ|Ρ = αN; T, ti |i = 1,2,3,…n) is a general notation for sukuk and may be specified for different types of sukuk.
3. For example, for sukuk al-ijara, (A.X.B, C; N, α, Ρ|Ρ = αN; T,ti |i = 1,2,3,…n) will represent a sakk issued by an issuer A on
   an asset X to be bought by investors B, with a notional price of N. The return on the sakk will be determined by the rental Ρ, which will be generated by leasing the asset to the party C involved in the structure (normally an obligor).
4. The relationships between A, B and C will be determined
   by sale contracts (C.X.A; P|T0) and (A.X.C; P|Tn) as per Cambridge Note 1 on Bai’, and lease contract (A, X, B; R = r1 r2 + rn, T) as per Cambridge Note 5 on Ijara.
5. Thus, a sukuk al-ijara may be notated like ((A.X.B, C; N, α, Ρ|Ρ = αN; T, ti |i = 1,2,3,…n)| (C.X.A; P|T0), (A, X, B; R = r1 + r2 rn , T), (A.X.C; P|Tn); Ρ = R))

Cambridge Note 10 on Wa’ad

1. represents a promise or undertaking (wa’ad) between A (promisor) and B (promisee) to buy a commodity/ asset X for the price P. Both the object of purchase/sale, X, and price, P, may be exchanged at a future date when a Bai’ or a sale and purchase agreement may be executed pursuant to the promise. represents a promise or undertaking (wa’ad) between B (promisor) and A (promisee) to buy a commodity/asset X for the price P.

2. represents a promise or undertaking (wa’ad) between A (promisor) and B (promisee) to sell a commodity/ asset X for the price P. Both the object of purchase/sale, X, and price, P, may be exchanged at a future date when a Bai’ or a sale and purchase agreement may be executed pursuant to the promise. represents a promise or undertaking (wa’ad) between B (promisor) and A (promisee) to sell a commodity/asset X for the price P.

3. The notation <•> implies a non-binding arrangement as opposed to the notation (•) that refers to a binding contract.

4. represents a promise or undertaking (wa’ad) between A (promisor) and B (promisee) at time T0 to buy a commodity/asset X for the price P at a future date T1. Both the object of purchase/sale, X, and price, P, may be exchanged at the future date T1 when a Bai’ or a sale and purchase agreement may be executed pursuant to the promise. This also applies to a promise to sell, i.e., .

5. [<A.X.B,PIb>,<B.X.A,PIs>] is an arrangement in which A promises to buy X for a price P, and B simultaneously promises to sell X for the same price P.

6. represents a promise or undertaking (wa’ad) between A (promisor) and B (promise) at time T0 to buy a commodity/asset X for the price P = Pm1 + ∆, where Pm1 is the future market price of the commodity/ asset X at a future date T1 and ∆ is an incremental which may be positive, negative or even zero. The same holds for a promise to sell, i.e., .

7. A promise to purchase between A (promisor) and B (promisee), i.e., , and a promise to sell between B (promisor) and A (promisee), i.e., , are considered equal and opposite promises.

8. Two promises will be considered as equal and diagonal promises if they must affect a binding arrangement in future. For example, and are two equal and diagonal promises, as B will call upon the first promise to purchase (given by A) if the promised price P is actually greater than the future market price Pm1. Also, A will call upon the second promise (given by B) if the promised price P is less than the future market price Pm1.