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

Chapter 10Bai al Urbun

Urbun represents the very simple concept of a downpayment. Ibnu qudamah defined it as “a transaction whereby the buyer buys a commodity and pays a deposit of one dirham or more on the understanding that the deposit will be considered part of the purchase price if the buyer decides to continue with the contract. If the buyer decides to withdraw from the contract, the seller will forfeit the deposit.”¹ It has been confused with options and other financial products found in the marketplace but in essence it is really just a downpayment.

As always, the best way to explain the concept is by using an example. Party A and B are parties to a sale contract, where Party B will sell an asset to Party A. Party B, however, does not own the asset that is to be the subject of sale. Party A promises Party B to purchase a particular asset from Party B if Party B can secure that asset from a vendor within a certain time frame. To show his or her keenness to purchase the asset, Party A offers Party B a deposit. If Party B secures the asset for Party A, this deposit will become part of the purchase price. If Party B secures the asset for Party A, but Party A decides not to purchase the asset, Party B is entitled to retain the deposit paid as urbun.

• Scenario 1

  Party A contracts with Party B to purchase an asset worth $100,000. Party B does not own the asset and obtains a deposit of $10,000 from Party A to secure Party A's interest in the transaction. Party B secures the asset ...