Originally, murabahah was a particular type of sale and not a mode of financing.
The ideal mode of financing according to Shariah are mudarabah or musharakah. However
in the perspective of the current economic circumstance there are certain practical
difficulties in using mudarabah and musharakah as instruments in every type of financing.
Therefore, the contemporary Shariah experts have allowed, subject to certain conditions,
the use of murabahah on a deferred payment basis as a mode of financing. However, there are
two important and essential points which must be remembered in this respect:
It should never be overlooked that originally murabaha was not a mode of
financing. Murabahah is only a device to escape from "interest" and not an
ideal instrument for carrying out the real economic objects of Islam.
Therefore, Murabahah as an instrument of financing should be used as a
transitory step taken in the process of the Islamization of the economy and
its use should be restricted to those cases where mudarabah or musharakah
are not practicable.
The murabahah transaction does not come into existence by merely
replacing the word 'interest' by the words "profit" or "mark-up". Actually,
murabahah as a mode of financing, has been allowed by the Shariah
scholars with some conditions. Unless these conditions are fully observed,
murabahah is not permissible. In fact it is the observance of these
conditions which can draw a clear line of distinction between the
interest-bearing loan and the transaction of murabahah. If these conditions
are not observed, the transaction becomes invalid according to Shariah.
Basic features of Murabahah financing
Murabahah is not a loan given o interest. It is a sale of a commodity for a
deferred price which includes an agreed profit added to the cost.
Being a sale and not a loan, murabahah should fulfill all the conditions
necessary for a valid sale.
The financier must have a good title to the commodity before he sells it to,br/>
The commodity must come into possession of the financier, whether
physically or constructively, in the sense that the commodity must be in
the risk of the financier even though the risk may be for a short period.
The best way for murabahah according to Shariah is that financier himself
purchases the commodity and keeps it in his own possession or purchases
the commodity through a third person appointed by him as his agent before
he sells it to the customer. However, it is also allowed that the financier
may make the client himself his agent to buy the commodity on his behalf.
In this case the client first purchases the commodity on behalf of his
financier and takes possession as such. Thereafter, he purchases the
commodity from the financier for a deferred price. His possession of the
commodity in the first instance is in his capacity as an agent of the
financier. In this capacity he is only a trustee while the ownership vests in
the financier and the risk of the commodity is also borne by the financier as
a logical consequence of the ownership. However, when the client
purchases the commodity from the financier, the ownership as well as the
risk is transferred to the client.
As mentioned earlier, the sale cannot take place unless the commodity
comes into the possession of the seller but the seller can sign an
agreement to sell even when the commodity is not in his possession. The
same rule is applicable to murabahah.
In the light of the aforementioned principles, a financial institution can use
the Murabahah mode of financing by adopting the following procedure:
||the client and the institution sign an over-all agreement whereby the institution promises to sell and the client promises to buy the commodity on
an agreed ratio of profit added to the cost.
||the institution appoints the client as his agent for purchasing the commodity on his behalf and an agreement of agency is signed by both the parties
||The client purchases the commodity on behalf of the institution and takes its possession as an agent of the institution
||the client informs the institution that he has purchased the commodity on its behalf and at the same time makes an offer to purchase the commodity
from the institution.
||the institution accepts the offer and the sale is concluded whereupon the ownership as well as the risk of the commodity is transferred to the client.
All the abovementioned five stages are necessary to effect a valid murabaha sale.
The most essential element of the transaction is that the commodity must remain in the risk of the institution
during the period between the third and the fifth stage. This is the only feature of murabahah which can distinguish it
from an interest-based transaction. Therefore, it must be observed with
due diligence otherwise the murabahah transaction becomes invalid according to Shariah.
It is also a necessary condition for the validity of murabahah that the
commodity is purchased from a third party. The purchase of the commodity
from the client himself on a buy back agreement is not allowed in the
Shariah. Thus murabahah based on 'buy-back' agreement is nothing more
than an interest-based transaction.
The abovementioned procedure of the murabahah financing is a complex
transaction in which the parties involved have different capacities at
different stages as follows:
||At the first stage, the institution and the client agree to sell and purchase
a commodity in the future. This is not an actual sale. It is only a promise
to effect a sale in future on a murabahah basis. Therefore, at this stage
the relationship between the institution and the client is that of a promisor
and a promisee.
||At the second stage, the relationship between the parties is that of a
principal and an agent.
||At the third stage, the relationship between the institution and the supplier
is that of a buyer and seller.
At the fourth and fifth stages, the relationship of buyer and seller comes
into existence between the institution and the client and since the sale is
affected on a deferred payment basis the relationship of a creditor and
debtor also emerges between them simultaneously.
All these capacities must be kept in mind and must come into operation with all their consequential
effects each at its relevant stage and these different capacities should never be mixed up or confused
with each other.
The institution may ask the client to furnish security to its satisfaction for
the prompt payment of the deferred price. It may also ask him to sign a
promissory note or bill of exchange but it must be after the actual sale
takes place i.e. at the fifth stage mentioned above. The reason is that the
promissory note is signed by a debtor in favour of his creditor but the
relationship of debtor and creditor between the institution and the client
begins only at the fifth stage whereupon the actual sale takes place
In the event of default by the buyer (client) in respect of the payment of
the purchase price on the due date, the purchase cannot be increased.
However, if he has undertaken in the agreement to pay an amount for a
charitable purpose, as mentioned in clause 7 of the rules of Bai'Mu'ajjal, he
shall be liable to pay the amount undertaken to be paid by him. However,
the amount so recovered from the buyer shall not form part of the income
of the seller/ the financier. The financier is bound to spend it for a
charitable purpose on behalf of the buyer (client).