Nikan has over 14 years experience in leading Wall Street and City firms on
the buy and sell-side including Lehman Brothers, Goldman-Sachs, Deutsche Bank,
Sanford Bernstein Alliance, Citadel and Nomura where he is currently Head of
European Rates Strategy. He has worked in a variety of primarily technical or
quantitative fixed income roles from Rates & Hybrids Structuring to Rates
Strategy and Quantitative Modelling to Asset Allocation and Risk Management to
Prepayment Analysis and Securitization and Capital Markets. Education: PhD
Mathematics (Courant Institute, NYU), Asst Prof University of Illinois.
Although technically Istijrar is just a repeat sale or 'supply' arrangement,
reference link), it is both a very sophisticated contract and in the form
most quoted can have elements resembling 'Asianing' in options (i.e., average
price), and barrier options. Although note that it is not really an Asian
option, but a series of barrier options. Further reference is given in
'Structuring Islamic Finance Transactions' (pp 71-2) by Thomas, Cox and Kraty
The modern use of the contract was begun by Mufti Taqi Usmani and this
interesting payoff is described in some detail in papers by Obiyathulla I.
Bacha's 'Istijrar: A Product of Islamic Financial Engineering' (see
link) and Dr Mohammed Obaidullah (New Horizon, no 68, Oct 1997). While it is not
possible to reproduce this latter article in electronic format as IIBI has not
yet finished scanning their back issues.
It is also mentioned in some detail in Obaidullah's online textbook (see
reference link, p 48), as well as in this lecture note by O.I. Bacha,
'Derivatives in Islamic Finance - An Overview' (see
reference link, p 21) and
his paper 'Derivative Instruments and Islamic Finance: Some Thoughts for a
reference link, p 23).
The details of the arrangement are as follows (according supposedly to Dr.
Muhammad Imran Ashraf Usmani), based on Meezan Bank's Guide to Islamic Finance
(see reference link, section 19). Please note that although this is a sale,
after the execution of the Master Murabaha, no offer or acceptance is issued and
sale is concluded merely by posession (bay al-ta'ati or al-mu'atah).
A Master Murabaha facility or Istijrar facility agreement is
signed between the bank and its client under which various Sub-Murabahas
would be extended:
At Time T0:
The Master Murabaha agreement will describe the following formula for the price
range an the Murabaha price P*:
The period during which the above two call options shall be valid is T0 -T90.
- The upper and lower range around the cost price P0 is determined. This price
range may be linked to a benchmark such as 'LIBOR+margin'. Hence the price bound
would change when the benchmark shifts.
- The Murabaha price P* or the exercise price is set. This is the price which may
be applied if the market price of the asset goes above or below the price range
during time T0-T90.
Settlement price Ps may be one of the following two:
- When the Sub-Murabaha or 'Declaration' is signed at T90, the sale is executed.
- The settlement price Ps is determined at this time.
At Ts: On the settlement date, the settlement price Ps is paid as set at time
- Avg price of asset during T0-T90
- Exercise price fixed by either party afte the market price of asset during time
T0-T90 has gone out of the rice range. This exercise price may be the murabaha
price P* or some other price fixed by either bank or customer.
- If a number of Sub-Murabahas have been executed under the Master Murabaha
Agreement, then each will be settled according t is own settlement price on the
- In order to decrease the price volatility between Declaration Date an the
Settlement Date, the duration may be reduced.
T0 - Time when Master Murabaha agreement or Istijrar agreement is signed.
T90 - Time when declaration is signed
Ts - Settlement Date P0- Cost price
P*- Murabaha Price
Declaration -- Offer and Acceptance between Custeomer and Bank to sell the asset
back to customer.
- Murabaha Price P* is to be determined at the time of extending the Sub-Murabaha.
- The Murabaha Price P* cannot be fixed as the settlement price Ps by the Bank or
the Customer during the tenor of the sub-Murabaha T0-T90
- Ps-settlement price may be the prevailing market price of an average of the
price during the Istijrar period.
- The price on the settlement date cannot be changed by either party even if the
market price has gone out of the pri range during the tenor of the sub Murabaha.
- Master Murabaha Agrement/Istijrar agreement is signed at T0
- Agency agrement is signed (if required) at T0.
- When the bank purchases the commodity the Declaration (Sub Murabaha) is signed
- Ps-the Settlement Price (Contract Price) is paid on the Settlement Date.
While the features of this derivative contract/arrangement are described in some
detail in these papers, the technicalities and legalities and Shariah aspects
are less easily found. But the amazing thing is that this arrangement is merely
a set of sales.
Islamic Law of sale is such that Istijrar is not considered a set of strange
options, no wa'ad is necessary, no khiyar is needed (although they can
apparently also be used). In sale contracts there is flexibility according to
the payment and settlement of price. Bay' bi Sirr al-Suqq or payment at
market-determined price (see
reference link) is the subject of relatively rich
discussion, this is one area of fiqh which touches upon Istijrar. The fact that
Istijrar is a repeat sale makes many scholars feel that this flexibility (delay
of payment and price set according to market average) should be afforded to this
arangement. Moreover, the embedded derivative elements help to reduce the risk,
reducing the gharar of the arrangement to something considered to be
Please note as well that Istijrar is extremely flexible and can be used for many
other types of contracts (e.g., ijara, and mudaraba, supposedly) and can
probably allow for a great many other payoff profiles. This usage of Islamic Law
of Sale is something that has not been explored to its fullest in Islamic
Finance, and we should probably expect much more future innovation in Islamic
Finance using Istijrar.
A future topic of discussion remains the notion of sale at market-determined
reference link) as well as the more conventional delay in payments
and conclusion of sale without offer/acceptance. Undoubtedly, Istijrar is one of
the hidden gems of Islamic Finance.
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