Article Review: Conventional Bank Interest and the Murabahah (cost-plus-profit) Contract in Islamic Finance: Two sides of a Coin or two Coins of different Sides?

By Abdullahi Saliu Ishola & Isa Olawale Solahudeen 

Murabahah is commonly used for financing the purchase of raw materials, machinery, equipment, and consumer durables. Because of the trust involved in the transaction and the aspiration of people that Murabahah is able to meet, it has been widely used and customers of Islamic banks all over the world have been making a preferred choice over other contracts. Murabahah contract is legal in accordance to the Shariah law and it had been practised by the early generations of Muslims. However, in the modern days, there are criticism and condemnation of some contemporary jurists. One of the argument is that Murabahah is too close to bank interest (Riba), or even the same as bank interest, but just called or being ‘legalised’ with other name or brand.
“Murabahah may be defined as a sale in which the margin of profit is mutually agreed upon between the buyer and the seller. The payment of sale price, inclusive of the agreed profit margin, may be immediate or deferred and either in lump sum or in instalments”[1]. Initially Murabahah was a form of sales agreement, but now being utilised as a mode of financing in the modern Islamic financial institutions[2]. Murabahah contract is of two forms, simple murabahah and murabahah to subscribers. The former is “when the seller market their goods to the buyer at a price corresponding acquisition cost plus profit margin desired” while the latter “involves three parties, namely the subscribers, the buyer and seller. It also involves as an intermediary buyers for their expertise or because the buyer will need financing”[3].
In modern time, the operation of Murabahah can take three forms. First, it may be that contracting parties mutually make unbinding promise to enter into this agreement and without mentioning a marked-up price in advance before the delivery of the commodity. Second, the marked-up price is mentioned before the delivery of the commodity. Third, the contracting parties mutually agree that both parties are liable to complete the contract and a marked-up price is mentioned before the commodity is delivered[4]. The first form is allowed as there is no binding promise between parties as to the completion of the contract and the customer is not liable to compensate the bank in case the commodity perished. There is also a risk as the bank is not sure if the customer is going to buy the commodity with profit. However the second and third forms are unlawful as the profitable amount to the bank has been fixed, and the other is because both parties agreed as to the liability of the parties to the completion of the contract and fixed profit to the bank.
The following conditions have to be met in order to make Murabahah a legal transaction. Knowledge of the initial price by the parties, knowledge of the profit margin, the original price is fungible, the goods in which the Murabahah is traded must not be eligible to riba, and initial contract must be valid.    
    While the principal murabahah steps are as follows. “First client indicates an interest in purchasing a particular asset from the bank for a certain price. Second, the client identifies the vendor, selects the goods and advises its particulars to the bank in writing. Third, the bank acquires the asset and offers to sell it to the client and the vendor then will make delivery of the asset to the client. Lastly, the agency ends. The client accepts the offer and the bank immediately sells the asset to the client, with payment due on agreed date in future”[5].
In opposing the criticism on Murabahah, Usmani said, “I do not subscribe to the view of those people who do not find any difference between the transactions of conventional banks and Murabahah and Ijarah for perpetuating the same business with a different name, because if Murabahah and Ijarah are implemented with their necessary conditions, they have many points of difference which distinguish them from interest-based transactions”[6].

[1] Muhammad Nejatullah Siddiqi, Issues in Islamic Banking (The Islamic Foundation, 1983), p 137, footnote 1.
[2] Al-Baraka Bank Release
[3] Atima Shofawati, ‘Murabahah Financing in Islamic Banking: Case Study in Indonesia’, p 4.
[4] Bakr Abdullahi Abu Zayd, ‘fiqh al-nawaazil qodoya fiqhiyyah mu’asirah’, p 79-80.
[5] Asurst Financial Briefing, January 2009, p 3.
[6] Muhammad Taqi Usmani, ‘An Introduction to Islamic Finance, Part Two (1999 Edition), p 97.


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