Supplying raw material for manufacturing and selling it to the manufacturer, with the price not calculated until after manufacturing
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Q: We are the Limited Company for Medical Supplies and Services
in Riyadh. We work in the field of medical devices, equipment, and supplies, and we wish to seek your assistance regarding the method of sales contracts based on the idea that the seller supplies goods to the buyer, whereby the buyer uses these goods to produce a specific product. The buyer then pays the seller the value of the supplied goods through the quantity of valid products produced, at a specific price, rather than the value of the goods originally supplied, taking into consideration the following: 1. The goods supplied to the buyer remain in his warehouses and under his control, although their ownership belongs to the seller. 2. The quantity of the final product may not correspond to the amount of raw material consumed, but this quantity may vary depending on the buyer’s method of consumption and his handling of the goods. 3. The price of the consumed product is agreed upon based on an approximate statistic that determines the products produced annually or within a specific time period provided by the buyer. This may be subject to an increase or decrease in quantity according to the buyer’s circumstances, without him bearing any responsibility for the decrease, knowing that the determining factor in this matter is not the number of products but only the agreed-upon time period.
An example to clarify this for your eminence: A flour supplier supplies flour to a bakery warehouse in quantities corresponding to the number of loaves the bakery produces and sells, based on statistics over an agreed-upon time period. The bakery owner pays the flour supplier based on the value of the valid loaves produced that are sold, at a fixed price per loaf produced and sold, not based on the quantity of flour supplied. It is known that the number of valid loaves sold (for which payment will be made) to the supplier depends on the efficiency of the baker and his workers, the purchasing power of the market for his products, and also on the quality of the flour supplied. Therefore, we request your eminence to respond with the Islamic ruling on this method of commercial dealing. May Allah reward you with good, and please accept our highest respect and appreciation.
A: This transaction, in which the buyer manufactures the goods supplied by the seller to his warehouses, and the price paid to the seller is calculated based on the materials suitable for manufacturing that the buyer produced by processing them into another form, is not valid as the sale described in the question. This is because if the contract is concluded before manufacturing, why is the estimation of its price delayed from that time? And if the contract is concluded after manufacturing, the buyer has disposed of what he does not own and transformed it from raw initial material into manufactured material before taking ownership of it.
The two parties to the contract can make this activity a form of partnership (musharakah), where the company provides the raw materials and the other party manufactures them in exchange for a known percentage of the output.
in Riyadh. We work in the field of medical devices, equipment, and supplies, and we wish to seek your assistance regarding the method of sales contracts based on the idea that the seller supplies goods to the buyer, whereby the buyer uses these goods to produce a specific product. The buyer then pays the seller the value of the supplied goods through the quantity of valid products produced, at a specific price, rather than the value of the goods originally supplied, taking into consideration the following: 1. The goods supplied to the buyer remain in his warehouses and under his control, although their ownership belongs to the seller. 2. The quantity of the final product may not correspond to the amount of raw material consumed, but this quantity may vary depending on the buyer’s method of consumption and his handling of the goods. 3. The price of the consumed product is agreed upon based on an approximate statistic that determines the products produced annually or within a specific time period provided by the buyer. This may be subject to an increase or decrease in quantity according to the buyer’s circumstances, without him bearing any responsibility for the decrease, knowing that the determining factor in this matter is not the number of products but only the agreed-upon time period.
An example to clarify this for your eminence: A flour supplier supplies flour to a bakery warehouse in quantities corresponding to the number of loaves the bakery produces and sells, based on statistics over an agreed-upon time period. The bakery owner pays the flour supplier based on the value of the valid loaves produced that are sold, at a fixed price per loaf produced and sold, not based on the quantity of flour supplied. It is known that the number of valid loaves sold (for which payment will be made) to the supplier depends on the efficiency of the baker and his workers, the purchasing power of the market for his products, and also on the quality of the flour supplied. Therefore, we request your eminence to respond with the Islamic ruling on this method of commercial dealing. May Allah reward you with good, and please accept our highest respect and appreciation.
A: This transaction, in which the buyer manufactures the goods supplied by the seller to his warehouses, and the price paid to the seller is calculated based on the materials suitable for manufacturing that the buyer produced by processing them into another form, is not valid as the sale described in the question. This is because if the contract is concluded before manufacturing, why is the estimation of its price delayed from that time? And if the contract is concluded after manufacturing, the buyer has disposed of what he does not own and transformed it from raw initial material into manufactured material before taking ownership of it.
The two parties to the contract can make this activity a form of partnership (musharakah), where the company provides the raw materials and the other party manufactures them in exchange for a known percentage of the output.
Source
www.alifta.gov.sa
The Arabic text is copied verbatim from the original source, without any edits.