Q. What is Murabaha?
1. Murabaha: (Cost-Plus Financing)
Sale on profit. Technically a contract of sale in which the seller declares his cost and profit. This has been adopted as a mode of financing by a number of Islamic banks. As a financing technique, it involves a request by the client to the bank to purchase a certain item for him. The bank does that for a definite profit over the cost which is settled in advance. Some people have questioned the legality of this financing technique because of its similarity to riba or interest.
A contract of sale between the bank and its client for the sale of goods at a price plus an agreed profit margin for the bank. The contract involves the purchase of goods by the bank which then sells them to the client at an agreed mark-up. Repayment is usually in instalments.
Used if you wish to purchase equipment or goods. We will purchase these items, and then sell them to you at cost - plus a reasonable profit.
Murabaha is the most popular and most common mode of Islamic inancing. It is also known as Mark up or Cost plus financing. The word Murabaha is derived from the Arabic word Ribh that means profit. Originally, Murabaha was a contract of sale in which a ommodity is sold on profit. The seller is obliged to tell the buyer his ost price and the profit he is making. This contract has been modified a little for application in the financial sectoIn its modern form Murabaha has become the single most popular technique of financing amongst the Islamic banks all over the world. It has been estimated that 80 to 90 percent of financial operations of some Islamic banks belong to this category. The Murabaha mode of finance operates in the following way: The client approaches an Islamic bank to get finance in order to purchase a specific commodity. An interest-based bank would lend the money on interest to this customer. The customer would go and buy the required commodity from the market. This option is not available to the Islamic bank, as it does not operate on the basis of interest. It can not lend the money on interest. It can not lend money with zero interest rate, as it has to make some money to stay in the business.
Some portion of total finance may be offered as an interest free loan, however, the banking institutions have to make profit in order to stay in business. Hence, what course of action is open to the bank? The Murabaha model offers a solution. The bank purchases the commodity on cash and sells it to the customer on a profit. Since the client has no money, he buys the commodity on deferred payment basis. Thus, the client got the commodity for which he wanted the finance and the Islamic bank made some profit on the amount it had spent in acquiring the commodity.
There are a number of requirements f or this transaction to be a real transaction to meet the Islamic standards of a legal sale. The whole of Murabaha transaction is to be completed in two stages. In the first stage, the client requests the bank to undertake a Murabaha transaction and promises to buy the commodity specified by him, if the bank acquires the same commodity. Of course, the promise is not a legal binding. The client may go back on his promise and the bank risks the loss of the amount it has spent. In the second stage, the client purchases the good acquired by the bank on a deferred payments basis and agrees to a payment schedule. Another important requirement of Murabaha sale is that two sale contracts, one through which the bank acquires the commodity and the other through which it sells it to the client should be separate and real transactions.
The Murabaha form of financing is being widely used by the Islamic banks to satisfy various kinds of financing requirements. It is used to provide finance in various and diverse sectors e. g. in consumer finance for purchase of consumer durable such as cars and household appliances, in real estate to provide housing finance, in the production sector to finance the purchase of machinery, equipment and raw material etc. However, probably the most common and the most popular application of Murabaha is in financing the short-term trade for which it is eminently suitable. Murabaha contracts are also used to issue letters of credit and to provide financing to import trade.
(Cost-plus financing) This is a contract sale between the bank and its client for the sale of goods at a price which includes a profit margin agreed by both parties. As a financing technique, it involves the purchase of goods by the bank as requested by its client. The goods are sold to the client with a mark-up. Repayment, usually in instalments is specified in the contract.
Q - I have observed that certain banks operating in Saudi Arabia have incorporated clauses in their Murabaha agreement that "In the event of default of payment, the customer will be black-listed and his name circulated to all other banks operating in Saudi Arabia. In accordance with the blacklisting rules the names will appear in the blacklist for a certain period of time even if the customer arranges settlement at a later date".
I feel that this will impose an unnecessary burden on the customers even though they agree to the inclusion of the clause in the Murabaha Agreement at the time of the execution. It is said the terms and conditions should be just and fair relating to transaction under the Shariah. I would like to know whether such conditions imposed in Murabaha Agreement is permissible under the Shariah.
A - The problem of default in Islamic banks has become very serious. In the interest-based loan system if the debtor defaults the interest keeps on increasing automatically which serves as a deterrent against default. But in the case of Islamic bank no extra charge can be imposed after the due date. It is, therefore, suggested by some circles that the defaulters should be blacklisted so that the apprehension of being blacklisted may serve as a deterrent against wilful default. This is an arrangement made on the basis of expedience which is not impermissible in Shariah. Even if this arrangement is not expressly mentioned in the agreement of Murabahah the government may act according to it. However, this should be done only in cases of wilful defaults, but if the debtor has faced a genuine hardship because of which he could not pay on time he must be given respite as expressly mentioned by the Holy Quran. Moreover, this penalization should not be exercised in cases where the debtor has paid shortly after the due date. It is therefore advisable that blacklisting is resorted to after a considerable time subsequent to the due date so that it may be ascertained whether the default was wilful and without a genuine reason.
Q - What is the Shariah ruling with regards to the purchase of a certain service and then its resale to a client? For example, if the bank were to pay a contractor to finish a building, and then sell the service to its client by means of murabaha payable in installments?
A - The sale of services by means of murabahah as envisioned in the question is not lawful. Rather, what is lawful is for the bank to complete the transaction as a contractor itself, or by entering into a contract of manufacture (istisna)
Q - May the bank enter into a murabahah transaction with a client who wishes to order the purchase of music cassettes, such as those used by children in their play?
A - Aside from the differing opinions on the question of the status of music in Islam, the Board's opinion is that bank should not engage in such transactions in accordance with the legal principle that legitimate means may be obstructed if it is feared that they may lead to illegitimate ends.
Q - What is the Shari'ah viewpoint concerning the purchase of tickets for travel and their resale, on a murabahah basis, to clients, by means of a special arrangement between the bank and the national (or any other) airline?
A - It is lawful for the bank to purchase tickets from an airline, and then to sell them on the basis of murabahah to its clients, provided that the agreement between the bank and the airline, and the details of how the transaction is to be carried out, are scrutinized beforehand by the Fatwa Council of the bank before the plan is implemented.
Q - What is the Shariah ruling in regard to the opening of a letter of credit for the import of cigarettes, or for its financing their purchase and sale through murabahah?
A - In view of the differences of opinion in regard to the ruling on smoking, and its prohibition, we will advise the bank to refrain from all such equivocal transactions. The Prophet, upon him be peace, said, "The lawful is self-evident, and the unlawful is self-evident; but between the two lie matters of ambiguity not readily understood by many people. Thus, those who avoid such matters will preserve their religion and reputations. But those who become involved with the ambiguous will (eventually) become involved with the unlawful." It should therefore be clear that the bank should have nothing to do with the likes of these dubious ventures.
Q - Is it lawful for the Islamic bank to invest surplus funds in operations with other banks (sometimes called investment accounts for banking operations) as a part of an initial agreement over the expected profits, as determined by the market prices and the profit margin agreed upon for murabahah sales, with the understanding that the deal will be completed when the portfolio is finally evaluated.
A- If the intent of the question is that an agreement will be made over expected profits, i.e., as yet unrealised, and that later on the matter will be settled on the basis of actual profits (when the portfolio is evaluated), then this will not be lawful. This is because jurists have resolved that profits will not appear until they are ready to be divided after the initial capital investment is recovered.
Q - May an Islamic bank finance the purchase of shares of stock in a land investment company, or any other sort of company that deals in lawful trade, by means of murabahah?
A - There seems to be no legal impediment to the bank's purchasing shares and then selling them to a third party by means of murabahah, if the company's cash assets are not in excess of its material value, and on condition that the company's business is in no way involved in the unlawful, such as usury, or intoxicants, or pork, or the like.
Q - Is it lawful for the bank, when it sells equipment to a company on the basis of murabahah, to add the costs of installation to the selling price?
A - It is lawful for the bank to conclude such a deal, provided that the price mentioned in the contract is clearly described as the price of the equipment plus the costs of installation.
Q - Some people have raised questions concerning the lawfulness of murabahah sales on credit for a term because these involve issues that resemble interest. They further question the lawfulness of a credit sale to the buyer, on the basis of the following:
- Such a transaction implies the sale of something that is not in the possession of the seller;
- There is a delay in exchange;
- The transaction involves sales of like for like, dollar for dollar, when the actual sale is delayed; i.e., there is a mutual exchange of identical currencies;
- According to the Maliki school, it is unlawful to stipulate the fulfilment of a promise in a contract of sale;
- Such a sale involves a degree of exaggeration, which is unlawful.
A - Murabahah sales are well known in the Shariah and are lawful by consensus, whether they are conducted for cash or credit. Moreover, the misgiving that murabahah involves interest, as a sale on credit, is without basis, and the same is true of misgivings concerning credit sales on terms.
The Committee affirms the resolution of the Second Conference on Islamic Banking held in Kuwait in regard to the murabahah sales and reservations about compulsion. The text of the resolution follows:
"The conference resolves that a mutually agreed upon promise to transact a murabahah sale to a buyer, following purchase and possession of goods (by a bank) for a specified amount of profit in accordance with a prior agreement is lawful, on condition that the bank will be responsible for loss or damage before delivery, and what accrues from the return of the merchandise if a return becomes necessary.
The promise and its binding nature (to both the buyer and the bank) safeguard the transaction and brings it stability, and therefore serves the interests of both. Thus, it is lawful for the Bank to insist on such a promise, and every bank has the right to follow the advice of its own Shariah board or supervisory body.
In response to those who harbour doubts concerning the validity of murabahah sales to buyers, we will point out the following:
- This agreement does not involve or imply a sale of something that one does not possess, because the agreement made with the buyer is concluded after actual possession. In addition, there is no agreement on the sale of what is not possessed.
- Ownership of the commodity takes place immediately upon either a cash or credit payment. Thus, there is no question of a delay of exchange between the parties.
- A usurious transaction of exchange in a loan on interest takes place when like commodities are exchanged. A lender, for example, will loan a hundred dollars for a certain period of time and will receive in exchange a hundred and ten dollars. In a murabahah sale on credit, however, the exchange is between unlike commodities, like goods and cash. Therefore, how can a murabahah sale be compared to a usurious transaction? It should further be noted that in a murabahah sale, even though the profit is fixed, the seller may still suffer a loss if market prices rise; and if market prices go down, the buyer may suffer a loss. All of this is a function of supply and demand in regard to the commodity, rather than the supply of and demand on cash.
- The stipulation prohibited by the Maliki school hinges on two points, and neither are present in the murabahah sale described here:
(i) The person who provides the commodity must be an owner of the capital sum;
(ii) The person requiring the commodity must intend to benefit from its price rather than from the commodity itself.
Q - This question relates to a murabahah transaction, where the bank opens a letter of credit in favour of the exporter but before shipment of the goods and payment. And the exporter accepts the bank's offer, i.e indicating its (exporters) agreement to the bank's opening a letter of credit and of the conditions (if any) accompanying it. May such a letter of agreement be considered acceptance (qubul) on the part of the exporter? Such that the transaction is complete? And, if this is indeed the case, then will it be lawful for the bank to dispose of the commodity as it wishes, by selling it, for example, to a purchase pledger, and then sending it to him/her in his/her name directly? Or must the bank take possession of the commodity and then deliver it to the purchase pledger?
A - It is not recommended that the bank take part in transactions in which the bank does not have a major role to play. Rather, in order to avoid any detriment to itself, and in order to avoid giving the impression that the bank's only role is as a bank roller, the bank should work through an agent in matters of buying and selling. The written agreement on (he part of the exporter to the offer and terms of the bank may be considered express acceptance (qubul). Then when both the offer and acceptance lake place, the transaction will be complete. The bank has no right to sell the commodity to the purchase pledger or anyone else before it receives payment from him/her or his/her agent. The commodity may not be shipped to the purchase pledger or to any other before (he bank enters into a contractual agreement with them.
Q - What is the Shariah ruling with regards to a bank seeking Kafalah (surety) from a purchase orderer in murabahah sales, guaranteeing the safe arrival of goods in working and acceptable condition?
A - Kafalah (surety) is lawful from a Shariah perspective because it is a voluntary sort of contract, and may be entered into before any right is established. In this case, the surety given will be as a guarantee against loss.
Q - Is it lawful for the bank to purchase goods from a seller, a third party for the purpose of selling those goods to the bank's client, the second party, by means of murabahah, and then have the bank authorise the second party to take delivery of the goods from the third party directly?
A - It is lawful for the bank to purchase goods from a third party in order to resell the same lo its client by means of a muabahah sale. After the goods have been sold lo the client, the second party, the bank may authorise its client to take delivery of the goods from the third party, but only after the goods have been sold to the bank and the hank has taken legal possession of them such that the goods have become the bank's responsibility. If however such legal possession has not taken place, and the bank has not become liable for the goods, it will not be lawful. This is because the Prophet of Allah, upon him be peace, prohibited one from prohibiting from that for which one is not liable.
Q - What is the Shariah ruling in regard to the Murabaha project for gold mining?
A - This project is unacceptable because it includes the sale of gold on credit, and in addition does not specify a dale of delivery. Under the circumstances, other alternatives should be studied by the bank; including the establishment of a joint stock company with shares representing material assets, thereby allowing shareholders to earn profits from the mining of gold.
Q - Charitable organisations generally present charitable projects to those desirous of assisting them and of establishing charitable trusts for Muslims. Examples of such projects are the digging of wells in African villages, or building mosques, or the printing and free distribution of books or the Qur'an, and the like. Is it lawful for a company to purchase these charitable services, and then sell them, through Murabahah sales, to persons who want to buy them, the main aim being to make a profit?
A - What may lawfully be possessed may lawfully be bought or sold; as the possessions of an individual or a group of individuals may be disposed of by the owner or owners as he or they please; like the digging of a well, and the like. Moreover, what may not lawfully be possessed may not lawfully be bought or sold, like a mosque, or land bequeathed as a religious endowment, or a similarly bequeathed well, or anything else that may not be bought or sold.
Q - What is the Shari'ah ruling in regard to tawarruq? What is our responsibility in regard to a person who deals with the Finance House in short term credit and murabahah sales in the trade in which he normally deals, like furniture. This patron came to the Finance House and evinced his desire to make a murabahah purchase of a quantity of cement owing to the rapidity with which it can be resold, as he desired to sell it (quickly) and then make use of the cash for his other mercantile needs.
A - In the terminology of fiqh, tawarruq is a stratagem for generating cash, when goods are purchased on a deferred payment, and then sold for less than the agreed price. Thus, the buyer goes into the deal knowing that he will lose, but accounting the cash worth the loss. Among the classical schools of fiqh, the only one to approve of such a transaction was the Hanbali school. There is no legal bar to this form of sale, though certain scholars have disliked it, particularly if someone habituates this sort of transaction.
Q - What would be the ruling where a bank was offered a deal to purchase a brick factory, including what was owed to the factory and what it owed. The purpose of this procedure was that the Bank would later sell the factory in a Murabahah sale.
All the conditions in the transaction that were required to protect our rights were fulfilled.But the one difficulty that remained in the process was that the factory was being held as security for a debt, and that it would remain as such until the bank took possession of it. What would be the Shariah boards decision in this case?
A - From a Shari'ah perspective, you are not permitted to buy other than what is actually present in the factory. Its financial responsibilities do not enter into the deal. If the physical plant, however, is pledged as security, the sale is permitted and the pledge will continue in the interests of the pledgee.
Q - In regard to murabahah sales, documents will be handed over to the purchaser so as to enable him to take delivery of the merchandise. At times, there will be demurrage charges on the merchandise, or a fine that is to be paid to customs owing to a delay in clearing the merchandise. My question is, who is to pay the fine? The purchaser, or the Finance House?
A - If the fine was brought about owing to a shortcoming on the part of the seller, the Finance House, then it will be responsible for paying the demurrage. If it was brought about by the buyer, however, he will be responsible.