Murabaha
Encyclopedia
Murabahah or murabaha is a particular kind of sale, compliant with shariah, where the seller expressly mentions the cost he has incurred on the commodities for sale and sells it to another person by adding some profit or mark-up thereon which is known to the buyer. As the requirement includes an "honest declaration of cost", murabahah is one of three types of bayu-al-amanah (fiduciary sale). The other two types of bayu-al-amanah are tawliyah (sale at cost) and wadiah (sale at specified loss).
It is one of the most popular modes used by bank
s in Islamic countries to promote riba
-free transactions. Different banks use this instrument in varying ratios. Typically, banks use murabahah in asset financing, property, microfinance
and commodity import-export.
The seller may not use murabahah if mudarabah or musharakah is practicable. Since those profit-sharing modes of financing involve risks, they cannot guarantee banks any income. Murabahah, with its fixed margin, offers the seller (i.e. the bank) a more predictable income stream. A profit-sharing instrument, conversely, is preferable as it shares the risks more equitably between seller and buyer.
There are, however, practical guidelines in place which aim to ensure that the murabahah transaction
between the bank
and the customer is one based on trade and not merely a financing transaction. For instance, the bank must take constructive or actual possession of the good before selling it to the customer. Whilst it can be justified to charge an additional margin to the customer to reflect the time value of money
in terms of actual payment
not being received from the customer at time zero, the bank can only impose penalties for late payment by agreeing to purify
them by donating them to charity.
The accounting treatment of murabahah, and its disclosure and presentation in financial statements, vary from bank to bank.
) from a third party broker. The Bank then sells the assets to the Borrower at cost plus a specified profit. Payment of the sale price is usually deferred and may be structured in accordance with the wishes of the parties. The Borrower will enter into a contract to sell the assets to the Broker for the cost price. The net result is to create a deferred payment obligation from the Borrower to the Bank. Bank and Customer will usually enter into a succession of such transactions to create monthly, quarterly or semi-annual payment obligations.
The Commodity Murabaha has been criticised by Islamic Scholars who say it should only be used as a structure of last resort where no other structure is available. In most transactions the commodities never change hands and usually there are no commodities at all, merely cashflows between banks, brokers and borrowers. Often the commodity is completely irrelevant to the Borrower's business and there is not even enough of the relevant commodities in existence in the world to account for all the transactions taking place.
It is one of the most popular modes used by bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s in Islamic countries to promote riba
Riba
Riba means one of the senses of "usury" . Riba is forbidden in Islamic economic jurisprudence fiqh and considered as a major sin...
-free transactions. Different banks use this instrument in varying ratios. Typically, banks use murabahah in asset financing, property, microfinance
Microfinance
Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services....
and commodity import-export.
The seller may not use murabahah if mudarabah or musharakah is practicable. Since those profit-sharing modes of financing involve risks, they cannot guarantee banks any income. Murabahah, with its fixed margin, offers the seller (i.e. the bank) a more predictable income stream. A profit-sharing instrument, conversely, is preferable as it shares the risks more equitably between seller and buyer.
There are, however, practical guidelines in place which aim to ensure that the murabahah transaction
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
between the bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
and the customer is one based on trade and not merely a financing transaction. For instance, the bank must take constructive or actual possession of the good before selling it to the customer. Whilst it can be justified to charge an additional margin to the customer to reflect the time value of money
Time value of money
The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time. The time value of money is the central concept in finance theory....
in terms of actual payment
Payment
A payment is the transfer of wealth from one party to another. A payment is usually made in exchange for the provision of goods, services or both, or to fulfill a legal obligation....
not being received from the customer at time zero, the bank can only impose penalties for late payment by agreeing to purify
Purify
Purify is a memory debugger program used by software developers to detect memory access errors in programs, especially those written in C or C++. It was originally written by Reed Hastings of Pure Software. Pure Software later merged with Atria Software to form Pure Atria Software, which in turn...
them by donating them to charity.
The accounting treatment of murabahah, and its disclosure and presentation in financial statements, vary from bank to bank.
Controversy
Under a Commodity Murabaha financing or Tawarooq, a Bank purchases and takes title to the relevant assets (usually precious metals such as PalladiumPalladium
Palladium is a chemical element with the chemical symbol Pd and an atomic number of 46. It is a rare and lustrous silvery-white metal discovered in 1803 by William Hyde Wollaston. He named it after the asteroid Pallas, which was itself named after the epithet of the Greek goddess Athena, acquired...
) from a third party broker. The Bank then sells the assets to the Borrower at cost plus a specified profit. Payment of the sale price is usually deferred and may be structured in accordance with the wishes of the parties. The Borrower will enter into a contract to sell the assets to the Broker for the cost price. The net result is to create a deferred payment obligation from the Borrower to the Bank. Bank and Customer will usually enter into a succession of such transactions to create monthly, quarterly or semi-annual payment obligations.
The Commodity Murabaha has been criticised by Islamic Scholars who say it should only be used as a structure of last resort where no other structure is available. In most transactions the commodities never change hands and usually there are no commodities at all, merely cashflows between banks, brokers and borrowers. Often the commodity is completely irrelevant to the Borrower's business and there is not even enough of the relevant commodities in existence in the world to account for all the transactions taking place.
See also
- Islamic bankingIslamic bankingIslamic banking is banking or banking activity that is consistent with the principles of Islamic law and its practical application through the development of Islamic economics. Sharia prohibits the fixed or floating payment or acceptance of specific interest or fees for loans of money...
- FINCA AfghanistanFINCA AfghanistanFINCA Afghanistan is a nonprofit microfinance organization and an affiliate of FINCA International. Its headquarters is based in Kabul, Afghanistan.-Background and history:...
, a murabaha-compliant microfinanceMicrofinanceMicrofinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services....
institution (MFI) - Shariah investmentsShariah investmentsShariah law is the Muslim or Islamic law which regulates many aspect of a Muslim’s life including the type of investments allowed. For instance, interests are considered usury according to the Riba rule therefore bonds are prohibited to investors following the Sharia law...