The Jo’aalah Contract in Islamic Finance

This is a contract under which one party, the Jaa’el or bank, undertakes to pay a specified amount of money, the Jo’ol, to the other party, the Amel or contractor, for rendering a service specified in the terms of the contract. Either party may opt to rescind the contract so long as the stipulated action under it has not been taken. A bank may enter a Jo’aalah agreement either as an Amel or as a Jaa’el, as necessary. In general, the right of the Amel to transfer part of the known activity to a third party under a secondary Jo’aalah, with the agreement of the other party, is reserved.

Responsibility for the preparations and purchase of materials, tools, equipment, performing a service and other essentials for carrying out the Jo’aalah may fall to either party, depending on the terms of the agreement. If the Amel accepts this responsibility, he should, at the outset, submit an estimate of all the operational costs for the Jo’ol to the Jaa’el.

The Jo’ol may be repaid either in lump sum or at intervals, in equal or unequal installments, at fixed maturity or maturities. Whenever the bank acts as an Amel, it is essential to obtain sufficient security from the Jaa’el to be assured of the fulfillment of commitments made; if necessary, arrangements should also be made to insure the property involved.

Source: Prof. Iraj Toutounchian, Thoughts from Iraj Toutounchian’s Islamic Money & Banking: Narrated by Camille Paldi. Republished with permission.