Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures

Chapter 6Bai al Wafa

Bai al wafa is a transaction of sale and buyback, where the prices in both sale contracts are the same and payment is made on spot. The Majelle defines this contract as “a sale of asset with the condition that if the seller pays back the price of the asset, the buyer shall return the asset to the seller.”¹ A bai al wafa contract must follow all the requirements of a sale contract as discussed in previous chapters. There must be the existence of two parties that have the legal capacity to contract, there must be a subject matter of sale in existence at the time of the transaction, there must be an offer to sell the asset at a spot price, and there must be an offer to buy the asset at the spot price.

The bai al wafa process flow is illustrated in Figure 6.1.

Figure 6.1 Bai al Wafa Process Flow

Party A sells the asset to Party B for a spot price of $100,000. The ownership of the asset is transferred to Party B, but this ownership is somewhat restricted. Party B can enjoy the usufruct of the asset, place it as rahn to a third party to obtain financing, or simply keep the asset in custody. Party B pays Party A the purchase price of the asset, $100,000.

At some point in the future, Party A pays Party B $100,000 and buys the asset back from Party B. Party B is required to return the asset to Party A and recover the purchase price of $100,000. Party B is unable ...