Islamic Banking Products – Part 3 – Murabahah
By Mohammed Waseem
Murabahah is another product based on the Islamic Sharee’ah; it refers to the sale of goods at a price which includes a profit margin, i.e. cost plus. This product is predominantly offered by Islamic banks in asset financing, property, microfinance and commodity import and export. A Murabahah contract has an honest declaration of cost and the expenses incurred on the product, along with the profit mark up being taken by the seller, which is the bank in this case.
The uses of Murabahah include short term, medium term and long term financing for inventory, raw materials, assets, export, import, vehicle, consumer goods, land and property, education, etc. This gives an idea on the use of Murabahah in Islamic banks. Murabahah facilitates deferred payments of which maybe in lump sum or in instalments. If the payment is being made on the spot in cash, there need not be any mention of the profit that the seller is making; this is known as Bay’ al Mu’ajjal. In case of deferred payment, which is Bay’ al Muajjal, cost price needs to be expressed; and here, the price charged can be either equal to, less than or more than the cash price payable in case of Ba’ al Mu’ajjal.
The justification scholars give for the validity of contracts where the deferred price is more than the cash price is that the value of the product or the property is subject to increase during the period of the contract and the seller has the right to claim such an increase in value. This is contrary to the concept of time value of money; while the value of products and property increase the value of money remains constant and does not increase or decrease with time.
Islamic banks have combined the concepts of Bay’ al Muajjal and Bay’ al Murabahah to offer Murabahah contracts. How the contract works is that the buyer instructs an Islamic bank to purchase a product or a property on his/her behalf with a promise to purchase the same at an agreed upon profit margin, by deferring the payment. So, the bank deals with the supplier and once the purchase is complete, the buyer takes possession of it, while paying in lump sum at a later date or by paying in instalments.
The basic rules of Murabahah include the existence of the subject (product or property) at the time of the agreement, the ownership of the subject with the bank while closing the sale, certain and assured delivery of the subject to the buyer (i.e. having no element of contingency), the express mention of price including markup, specified time of delivery, payment schedule and the term of payment. It must be noted that the price expresses is not subject to increase in case of any default on part of the buyer; such an increase would amount to usury, which is strictly prohibited in the Sharee’ah. It should also be noted that discounting a Murabahah contract is also not permitted for the reason that it would again amount to usury.
A Murabahah contract can’t be rolled over until the contract ends. The ownership of the sold subject is immediately transferred to the buyer after the sale and the seller can claim only the amount specified in the contract. There is no scope of entering into another contract concerning the same subject until the first contract ends.
Most Islamic banks offer Murabahah in different forms and under different sub-categories, but the basic rules remain the same.