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Amanah

This is not a contract as such, but is a feature or a requirement in some specific contracts that impose on one of the parties to disclose the actual cost price, such as in murabahah sale as compared to negotiated price sale (musawwamah) with no requirement for such disclosure.

Amanah relates to the part of the buyer/seller relationship that is based on trust. This might occur where the financial institution buys goods from a third party vendor on the request of the institution’s customers, which will subsequently purchase the goods from the financial institution.

Upon purchasing the goods from the vendor, the financial institution assumes risks relating to the specified asset until the point of purchase by the buyer. An amanah, or trusteeship, is required of the seller/financier to disclose the actual cost of the goods purchased from the vendor before selling it to the customer at cost plus mark-up.

Another example of amanah being introduced into an Islamic financial arrangement would be wadiah yad-amanah, which is where a bank, as the custodian, undertakes the task of safekeeping the assets or funds deposited by a customer in a safe custody contract, based on trusteeship. It is executed between two parties, namely the depositor (owner) and the bank (custodian).

The liability of the custodian triggers only in cases of negligence and misconduct. This is to distinguish between safe custody contracts, which are based on liability, and this safe custody contract, which relies on trusteeship.

It establishes the liability of one of the parties, whereby a contract that is featured as Amanah will not inflict any legal liability on the part of the custodian, except in the case of negligence and misconduct.

Key principles of amanah:

  • requires a true and honest disclosure of the cost price in all Amanah-based sales
  • establishes liability on trustees only in cases of negligence and misconduct.