Murabaha

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Murabaha (Murabahah, مرابحة) is a contract, whereby the seller declares the profit he made on the good sold. In Islamic finance the term is used for sales contracts, whereby the bank is selling against deferred payment (Bay Muajjal) and declared profit rate.

Conditions

The basic conditions according to Sheikh Usmani of these contract type is offer and acceptance, the exchange commodities needs both be of value and not prohibited and the item needs already to be existing. Further both parties must be owners of the “commodities” exchanged and the subject of the sale must be in the physical or constructive possession of the seller when he sells it to another person.

Additional conditions named by Sheikh Usmani for this kind of credit sale is the clear fixing of the date or defined period. The price can be higher than spot but needs to be fixed at the time of the sale and cannot be changed in either direction. Collateral is permissible but late payment cannot be charged, however, a promise can be accepted from the buyer to donate to charity, which motivates payments on time.

Promise and Agency

One of the concerns for the financial institutions was that the client may withdraw from his buying intention. Islamic law does not permit to conduct a sales contract before being owner of the goods contracted. Consequently the financer needed to obtain the good before it can sell it on credit. However, during this process, the client may resign and the financer would have the good bought for him.

The solution found by Shariah scholars was to replace an illegal forward contract between financer and ultimate buyer with a promise. A contract cannot be made about future payment and future delivery; however, an unilateral promise to buy or the other side to sell, has a different legal nature as long as it does not match each other like a contract. A matter of discussion was, whether such a promise could be binding. According to Zuhayli, Ibn Shabramah from the Maliki school ruled that a promise is legally binding by the condition that is does not permit forbidden activities or forbid allowed ones. For the other schools it is only religiously binding, and as agreed upon on dedicated conferences, it could be made legally binding if it is beneficient and possible to regulate legally (11. Cost-Plus Sales, p. 361). The majority of Islamic scholars in the field of finance do agree to this procedure.

Finally, a financer is typically not interested to go out buying goods for their clients, rather they ask the clients to become their agent (wakil) to act in behalf of them in acquiring the good to be financed. After having done so, ownership is with the financer and a credit sale could be concluded.

However the excessive use of agency is also creating problems for the islamic industry, the main issue is the risk of commodity being consumed by the agent before the murabaha sale.This can be overcome if third parties start acting as agents for islamic banks.--Akhtar 04:21, 25 January 2011 (UTC)

Credit Sale versus Money Credit

The Credit Sale is very similar to a bank credit and therefore often not understood as being Riba free as the financing costs could be the same as for interest bearing loans. The majority of Islamic scholars accept it, a minority are against it and the majority of Islamic Economist dislike it.

As the Quran explicitly allows trade and a sale as well as a credit sale qualifies as trade it is considered permissible. The increased price is part of the trade. Along with the credit sale goes the ownership with its typical risks, even if borne only during “a legal second.” Risks a conventional banker would typically like to exclude. The Credit Sale follows the rule “no pain, no gain”, which is one of the cornerstones of Islamic Finance. The forbidden Riba as already defined is not subject to exchange of two different items, but for exchange of money.

Further a Credit Sale locks in the price, even if the installments are delayed. An increase on installments would be legally considered to be Riba and therefore prohibited. The way to prompt the customer who delays without good reason is to agree to a penalty in favour to a third party, a Charity. That way the Islamic financer does not take the forbidden Riba and enrich themselves, but their client is motivated to pay on time as long as it is possible.

A third difference is not found so far in the literature and looks into the way of pricing itself. A money credit has a general rate all over the market for the same credit risk. An Credit Sale is basically a Vendor Finance, which needs to be looked at differently: The price for a good is subject to demand and supply – and the price equilibrium which maximises the profit for the seller is not given by an increase of 10 % of the price if the financing costs are 10 %. If the clients buy substantially more with a 5 % increase the total profit would be higher. This kind of considerations are typical for financing questions in trade of goods, but not for money. At the current stage this price differentation is not applied; only sometimes without Islamic background it can be discovered in the markets: Car financing at 2,9 % or even free of charge is a proof of this argument. The microeconomic evidence to consider it trade and not a time-value instrument like loans is nevertheless given.

The advantage offered to both sides in an Asset Finance deal becomes only reality if not undertaken separately, by being only a financial intermediary. Noteworthy to remark is that a number of Islamic banks indeed established trading departments and show rooms to directly sell to clients including the finance facility – from the microeconomic point of view and from the Islamic legal point of view a preferable way; however contemporary banking regulation is not in favour of it.

Bibliography