SS 22 · General

SS 22: Concession Contracts

What this standard is about

SS 22 covers concession contracts for the use, construction or management of projects. A typical case: a government grants a private company the right to build a highway, collect tolls for thirty years, and then return the highway to the state. This is often called a BOT arrangement (build, operate, transfer).

The standard gives the basic Shariah rulings for these deals. It also gives guidance to financial institutions on how to apply them. Such contracts combine several steps, so the standard checks each step against Islamic law.

Why it exists

Large infrastructure projects often need private money and private management. Muslim-majority countries needed to know how these long-term concession deals could work without breaking Islamic law. A single standard prevents each deal from starting from zero.

The key rules, simply put

A concession contract is permissible when the project itself is halal. Financing a casino or a liquor factory would fail.
The construction phase usually uses istisna'a (a manufacturing contract for something to be built to order). The build terms must be clearly specified.
The operation phase usually uses ijarah (leasing), where the operator leases the project and collects its income.
The financing behind the deal must not involve riba (interest).
The contract must avoid gharar (excessive uncertainty). The rights, duties, duration and payment terms of each side must be spelled out.
The handover at the end must be clearly agreed. Each party must know when the project transfers and in what condition.

An everyday example

A government signs a concession contract with a company to build a toll bridge. The company finances the construction under a Shariah-compliant contract, operates the bridge and collects tolls for twenty-five years, then transfers the bridge to the government. Each phase has written terms: what is built, how much is collected, who maintains the bridge, and what condition it must be in at handover.

Words to know

Concession contract — a grant giving a party the right to build, operate or manage a project, usually for a fixed period
BOT — build, operate, transfer; the party builds a project, runs it, then hands it back
Istisna'a — a contract to manufacture or construct something to order at an agreed price
Ijarah — leasing; the transfer of the use of an asset for a set time at an agreed rent
Riba — interest, or any guaranteed excess on a loan; forbidden in Islam
Gharar — excessive uncertainty in a contract; forbidden in Islam

Source

AAOIFI Shariah Standard No. 22 — https://islamicmarkets.com/standards/aaoifi-shariah-standards/concession-contracts/scope-shariah-ruling-21