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Islamic Fiance: Some misperceptions about Murabaha

There are some misperceptions about Murabaha and it's important that we discuss them. It will help us understand th

function of Murabaha does not violate Sharia principles in any manner whatsoever.

There are some misperceptions about Murabaha and it's important that we discuss them. It will help us understand th

function of Murabaha does not violate Sharia principles in any manner whatsoever.

Why different prices for cash and credit sale under a Mura-baha transaction?

An Islamic bank deals in goods under Murabaha in different ways. In case of establishing a letter of credit on custome

behalf, the goods upon receipt could be delivered to the customer against cash downpayment, which inclu-des usual

and commission besides some exchange profit.

On the other hand, bank can also allow a customer to settle the amount upon completion of the agreed period. The pr

goods under Murabaha, in case of allowing deferred payment terms to the customer, is always higher then when he p

cash.

Some quarters argue that increasing the price of Murabaha goods for the deferred payment period is akin to charging

interest. Let us examine this issue for our better understanding.

Please keep in mind that, according to Sharia, money and commodity have different characteristics and therefore, the

treated differently. The owner of a commodity is at liberty to set the price and the buyer too has his own free will whet

buy the commodity at a certain price.

As such, an additional amount charged on payment being made on deferred basis will be considered interest only wh

subject matter is money on both sides, e.g. a loan. But if a commodity is sold in exchange of money, the seller, when

the price, may take into consideration different factors, including the time taken by the buyer in settling the amount.

This is because if the seller would have got the spot payment, he was in a position to re-invest it immediately in the o

goods and earn more profit. By allowing time to the buyer for payment, he is getting deprived of that additional profit. O

other hand, buyer willingly takes it upon himself to compensate the seller for such lost profit.

Therefore, it is not prohibited by Sharia to set different prices of the same commodity if sold on cash or deferred paym

basis provided the buyer has accepted either of the price willingly since the agreed price is against a commodity and

against money.

However, the most important aspect which differentiates an Islamic bank from a conventional one is that once the pric

fixed, it can not be changed irrespective of whether the buyer pays in time or defaults. This position is accepted

unanimously by all schools of Islamic jurisprudence and majority of the Muslim jurists.

Why use an interest rate as benchmark?

We have discussed it earlier in this column that benchmarking of Murabaha profit, or profit for any Islamic financing pr

for that matter, is based on various cogent reasons such as wider understanding of the interest rate benchmarks in th

region, the absence of an Islamic profit benchmark and the fear on the part of the customer for ending up paying highe

the market.

The most essential requirement for validity of a Murabaha transaction is the existence of genuine sale with all ingredie

enumerated in the last week's column. Therefore, merely the use of interest rate as benchmark for determining the pro

does not render the transaction invalid because the deal itself does not contain the element of interest.

Why promise to purchase?

By Sohail ZubairiJanuary 27, 2003

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This argument stems from the principle that one cannot sell a commodity not owned by him, nor can he effect a forwa

sale under Sharia. Obtaining promise to purchase from the client, therefore, tantamount to forward sale and should th

be avoided.

Imagine the situation where a bank enters into a Murabaha transaction with a customer without having obtained prom

purchase. The bank buys the commodity on behalf of client who fails to turn up to purchase it from the bank.

The bank is now stuck with the goods which may be costly and have specific use and hence difficult to dispose of. It

therefore, vital to bind the customer by way of obtaining promise to purchase at the time of entering into Murabahatransaction in order to safeguard bank's interest.

It is important to understand that the promise to purchase is not a bilateral contract as required in forward sale in

conventional banking environment. It is simply a unilateral promise from the client which binds him and not the bank.

a one-sided promise, it is easily distinguishable from the bilateral forward sale contract.

This leads to another argument that a unilateral promise only creates a moral obligation but it cannot be enforced. Ca

one-sided promise is enforceable in Sharia? In short, the answer is yes, since Sharia implies high importance to fulfill

promise irrespective of the circumstances faced by the promisor.

Could there be a rollover in Murabaha?

Some people consider that Murabaha could be rolled over by adding the profit for the extended period if the buyer agre

bear it. This contention is incorrect. A Murabaha transaction cannot be rolled over for a further period as it belongs to

specific commodity which has already been sold and hence can not be sold twice.

It needs to be clearly understood that Murabaha is not a loan transaction but the sale of a commodity the price of whi

deferred to a specific date. Once the commodity is sold, its ownership is passed on to the client irrespective of the ter

payment. Hence it is no more the property of the seller. As such how can the bank sell a commodity which is not ow

it?

Will an Islamic bank allow rebate on earlier payment of Murabaha?

The question in the minds of many people is whether they can earn a discount by paying the Murabaha amount earlieit is due?

This issue has been discussed by the Sharia scholars in detail, concluding that since Murabaha represents sale of a

specific commodity, the price of which is a settled issue, there can be no rebate or discount on voluntary early payme

the buyer.

A majority of jurists opine that if the early payment is conditioned with discount, it is not permissible. However, if the

is not an attraction for prepayment, and the bank gives an allowance voluntarily, it may be permissible under Sharia.

What needs to be understood is that the customer can not claim it to be his right and hence it can not be made a con

of the Murabaha agreement.