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Islamic Finance - Musharakah & Mudarabah
By Mufti Muhammad Taqi
Usmani
Some Issues
Involved In Murabahah
1) Introduction
2) The modern capitalist
3) The use of Interest-Rate as Benchmark
4) Promise to purchase
5) Securities Against Murabahah Price
6) Guaranteeing the Murabahah
7) Penalty of Default
8) No Roll Over in Murabahah
9) Rebate on earlier payment
10) Calculation of Cost in Murabahah
11) Subject - matter of Murabahah
12) Rescheduling of payments in murabahah
13) Securitization of murabahah
14) Some Basic Mistakes In Murabahah Financing
15) Conclusions
Introduction:
So far the
basic concept of Murabahah has been explained. Now, it is
proposed to discuss some relevant issues with reference to the
underlying Islamic principles and their practical applicability
in murabahah transaction, because without correct understanding
of these issues, the concept may remain ambiguous and its
practical application may be susceptible to errors and
misconceptions.
Different pricing for cash and credit sales The first and
foremost question about murabahah is that, when used as a mode
of financing, it is always effected on the basis of deferred
payment. The financier purchases the commodity on cash payment
and sells it to the client on credit. While selling the
commodity on credit, he takes into account the period in which
the price is to be paid by the client and increases the price
accordingly. The longer the maturity of the murabahah payment,
the higher the price. Therefore the price in a murabahah
transaction, as practiced by the Islamic banks, is always higher
than the market price. If the client is able to purchase the
same commodity from the market on cash payment, he will have to
pay much less than he has to pay in a murabahah transaction on
deferred payment basis. The question arises as to whether the
price of a commodity in a credit sale may be increased from the
price of a cash sale. Some people argue that the increase of
price in a credit sale, being in consideration of the time given
to the purchaser, should be treated analogous to the interest
charged on a loan, because in both cases an additional amount is
charged for the deferment of payment. On this basis they argue
that the murabahah transactions, as practiced in the Islamic
banks, are not different in essence from the interest-based
loans advanced by the conventional banks.
This argument, which seems to be logical in appearance, is based
on a misunderstanding about the principles of Shari‘ah
regarding the prohibition of riba. For the correct comprehension
of the concept the following points must be kept in view:
The modern capitalist
The modern capitalist theory does not differentiate between
money and commodity in so far as commercial transactions are
concerned. In the matter of exchange, money and commodity both
are treated at par. Both can be traded in. Both can be sold at
whatever price the parties agree upon. One can sell one dollar
for two dollars on the spot as well as on credit, just as he can
sell a commodity valuing one dollar for two dollars. The only
condition is that it should be with mutual consent.
The Islamic principles, however, do not subscribe to this
theory. According to Islamic principles, money and commodity
have different characteristics and therefore, they are treated
differently. The basic points of difference between money and
commodity are the following:
(a) Money has no intrinsic utility. It cannot be utilized
for fulfilling human needs directly. It can only be used for
acquiring some goods or services. The commodities, on the other
hand, have intrinsic utility. They can be utilized directly
without exchanging them for some other thing.
(b) The commodities can be of different qualities, while
money has no quality except that it is a measure of value or a
medium of exchange. Therefore, all the units of money, of same
denomination, are 100% equal to each other. An old and dirty
note of Rs. 1000/- has the same value as a brand new note of Rs.
1000/-, unlike the commodities which may have different
qualities, and obviously an old and used car may be much less in
value than a brand new car.
(c) In commodities, the transaction of sale and purchase is
effected on a particular individual commodity or, at least, on
the commodities having particular specifications. If A has
purchased a particular car by pin-pointing it and seller has
agreed, he deserves to receive the same car. The seller cannot
compel him to take the delivery of another car, though of the
same type or quality. This can only be done if the purchaser
agrees to it which implies that the earlier transaction is
cancelled and a new transaction on the new car is effected by
mutual consent.
Money, on the contrary, cannot be pin-pointed in a transaction
of exchange. If A has purchased a commodity from B by showing
him a particular note of Rs. 1000/- he can still pay him another
note of the same denomination, while B cannot insist that he
will take the same note as was shown to him.
Keeping these differences in view, Islam has treated money and
commodities differently. Since money has no intrinsic utility,
but is only a medium of exchange which has no different
qualities, the exchange of a unit of money for another unit of
the same denomination cannot be effected except at par value. If
a currency note of Rs. 1000/- is exchanged for another note of
Pakistani Rupees, it must be of the value of Rs. 1000/- The
price of the former note can neither be increased nor decreased
from Rs. 1000/- even in a spot transaction, because the currency
note has no intrinsic utility nor a different quality
(recognized legally), therefore any excess on either side is
without consideration, hence not allowed in Shari‘ah. As this
is true in a spot exchange transaction, it is also true in a
credit transaction where there is money on both sides, because
if some excess is claimed in a credit transaction (where money
is exchanged for money) it will be against nothing but time.
The case of the normal commodities is different. Since they have
intrinsic utility and have different qualities, the owner is at
liberty to sell them at whatever price he wants, subject to the
forces of supply and demand. If the seller does not commit a
fraud or misrepresentation, he can sell a commodity at a price
higher than the market rate with the consent of the purchaser.
If the purchaser accepts to buy it at that increased price, the
excess charged from him is quite permissible for the seller.
When he can sell his commodity at a higher price in a cash
transaction, he can also charge a higher price in a credit sale,
subject only to the condition that he neither deceives the
purchaser, nor compels him to purchase, and the buyer agrees to
pay the price with his free will.
It is sometimes argued that the increase of price in a cash
transaction is not based on the deferred payment, therefore it
is permissible while in a sale based on deferred payment, the
increase is purely against time which makes it analogous to
interest. This argument is again based on the misconception that
whenever price is increased taking the time of payment into
consideration, the transaction comes within the ambit of
interest. This presumption is not correct. Any excess amount
charged against late payment is riba only where the subject
matter is money on both sides. But if a commodity is sold in
exchange of money, the seller, when fixing the price, may take
into consideration different factors, including the time of
payment. A seller, being the owner of a commodity which has
intrinsic utility may charge a higher price and the purchaser
may agree to pay it due to various reasons, for example:
(a) his shop is nearer to the buyer who does not want to
go to the market which is not so near.
(b) The seller is more trust-worthy for the purchaser
than others, and the purchaser has more confidence in him
that he will give him the
required thing without any defect.
(c) The seller gives him priority in selling commodities
having more demand.
(d) The atmosphere of the shop of the seller is cleaner and
more comfortable than other shops,
(e) The seller is more courteous in his dealings than
others.
These and similar other considerations play their role in
charging a higher price from the customer. In the same way, if a
seller increases the price because he allows credit to his
client, it is not prohibited by Shari'ah if there is no cheating
and the purchaser accepts it with open eyes, because whatever
the reason of increase, the whole price is against a commodity
and not against money. It is true that, while increasing the
price of the commodity, the seller has kept in view the time of
its payment, but once the price is fixed, it relates to the
commodity, and not to the time. That is why if the purchaser
fails to pay at the stipulated time, the price will remain the
same and can never be increased by the seller. Had it been
against time, it might have been increased, if the seller allows
him more time after the maturity.
To put it another way, since money can only be traded in at par
value, as explained earlier, any excess claimed in a credit
transaction (of money in exchange of money) is against nothing
but time. That is why if the debtor is allowed more time at
maturity, some more money is claimed from him. Conversely, in a
credit sale of a commodity, time is not the exclusive
consideration while fixing the price. The price is fixed for
commodity, not for time. However, time may act as an ancillary
factor to determine the price of the commodity, like any other
factor from those mentioned above, but once this factor has
played its role, every part of the price is attributed to the
commodity.
The upshot of this discussion is that when money is exchanged
for money, no excess is allowed, neither in cash transaction,
nor in credit, but where a commodity is sold for money, the
price agreed upon by the parties may be higher than the market
price, both in cash and credit transactions. Time of payment may
act as an ancillary factor to determine the price of a
commodity, but it cannot act as an exclusive basis for and the
sole consideration of an excess claimed in exchange of money for
money.
This position is accepted unanimously by all the four schools of
Islamic law and the majority of the Muslim jurists. They say
that if a seller determines two different prices for cash and
credit sales, the price of the credit sale being higher than the
cash price, it is allowed in Shari'ah. The only condition is
that at the time of actual sale, one of the two options must be
determined, leaving no ambiguity in the nature of the
transaction. For example, it is allowed for the seller, at the
time of bargaining, to say to purchaser, "If you purchase
the commodity on cash payment, the price would be Rs. 100/- and
if you purchase it on a credit of six months, the price would be
Rs. 110/-" But the purchaser shall have to select either of
the two options. He should say that he would purchase it on
credit for Rs. 110/- Thus, at the time of actual sale, the price
will be known to both parties.
However, if either of the two options is not determined in
specific terms, the sale will not be valid. This may happen in
those installment sales in which different prices are claimed
for different maturities. In this case the seller draws a
schedule of prices according to schedule of payment. For
example, Rs. 1000/- are charged for the credit of 3 months Rs.
1100/- for the credit of 6 months, Rs. 1200/- for 9 month and so
on. The purchaser takes the commodity without specifying the
option he will exercise, on the assumption that he will pay the
price in future according to his convenience. This transaction
is not valid, because the time of payment, as well as the price,
is not determined. But if he chooses one of this options
specifically and says, for example, that he purchases the
commodity on 6 months credit with a price of 1100/- the sale
will be valid.
Another point must be noted here. What has been allowed above is
that the price of the commodity in a credit sale is fixed at
more than the cash price. But if the sale has taken place at
cash price, and the seller has imposed a condition that in case
of late payment, he will charge 10% per annum as a penalty or as
interest, this is totally prohibited; because what is being
charged is not a part of the price; it is an interest charged on
a debt.
The practical difference between the two situations is that
where the additional amount is a part of the price, it may be
charged on a one time basis only. If the purchaser fails to pay
it on time, the seller cannot charge another additional amount.
The price will remain the same without any addition. Conversely,
where the additional amount is not a part of the price it will
keep increasing with the period of default.
The use of Interest-Rate as Benchmark
Many institutions financing by way of murabahah determine their
profit or mark-up on the basis of the current interest rate,
mostly using LIBOR (Inter-bank offered rate in London) as the
criterion. For example, if LIBOR is 6%, they determine their
mark-up on murabahah equal to LIBOR or some percentage above
LIBOR. This practice is often criticized on the ground that
profit based on a rate of interest should be as prohibited as
interest itself.
No doubt, the use of the rate of interest for determining a
halal profit cannot be considered desirable. It certainly makes
the transaction resemble an interest-based financing, at least
in appearance, and keeping in view the severity of prohibition
of interest, even this apparent resemblance should be avoided as
far a possible. But one should not ignore the fact that the most
important requirement for validity of murabahah is that it is a
genuine sale with all its ingredients and necessary
consequences. If a murabahah transaction fulfils all the
conditions enumerated in this chapter, merely using the interest
rate as a benchmark for determining the profit of murabahah does
not render the transaction as invalid, haram or prohibited,
because the deal itself does not contain interest. The rate of
interest has been used only as an indicator or as a benchmark.
In order to explain the point, let me give an example.
A and B are two brothers. A trades in liquor which is totally
prohibited in Shari‘ah. B, being a practicing Muslim dislikes
the business of A and starts the business of soft drinks, but he
wants his business to earn as much profit as A earns through
trading in liquor, therefore he resolves that he will charge the
same rate of profit from his customers as A charges over the
sale of liquor. Thus he has tied up his rate of profit with the
rate used by A in his prohibited business. One may question the
propriety of his approach in determining the rate of his profit,
but obviously no one can say that the profit charged by him in
his halal business is haram, because he has used the rate of
profit of the business of liquor as a benchmark.
Similarly, so far as the transaction of murabahah is based on
Islamic principles and fulfils all its necessary requirements,
the rate of profit determined on the basis of the rate of
interest will not render the transaction as haram.
It is, however true that the Islamic banks and financial
institutions should get rid of this practice as soon as
possible, because, firstly, it takes the rate of interest as an
ideal for a halal business which is not desirable, and secondly
because it does not advance the basic philosophy of Islamic
economy having no impact on the system of distribution.
Therefore, the Islamic banks and financial institutions should
strive for developing their own benchmark. This can be done by
creating their own inter-bank market based on Islamic
principles. The purpose can be achieved by creating a common
pool which invests in asset-backed instruments like musharakah,
ijarah etc. If majority of the assets of the pool is in tangible
form, like leased property or equipment, shares in business
concerns etc. its units can be sold and purchased on the basis
of their net asset value determined on periodical basis. These
units may be negotiable and may be used for overnight financing
as well. The banks having surplus liquidity can purchase these
units and when they need liquidity, they can sell them. This
arrangement may create inter-bank market and the value of the
units may serve as an indicator for determining the profit in
murabahah and leasing also.
Promise to
purchase
Another
important issue in Murabahah financing which has been subject of
debate between the contemporary Shari‘ah Scholars is that the
bank/financier cannot enter into an actual sale at the time when
the client seeks murabahah financing from him, because the
required commodity is not owned by the bank at this stage and,
as explained earlier, one cannot sell a commodity not owned by
him, nor can he effect a forward sale. He is, therefore, bound
to purchase the commodity from the supplier, then he can sell it
to the client after having its physical or constructive
possession. On the other hand, if the client is not bound to
purchase the commodity after the financier has purchased it from
the supplier, the financier may be confronted with a situation
where he has incurred huge expenses to acquire the commodity,
but the client refuses to purchase it. The commodity may be of
such a nature that it has no common demand in the market and is
very difficult to dispose of. In this case the financier may
suffer unbearable loss.
Solution to this problem is sought in the murabahah arrangement
by asking the client to sign a promise to purchase the commodity
when it is acquired by the financier. Instead of being a
bilateral contract of forward sale, it is a unilateral promise
from the client which binds himself and not the financier. Being
a one-sided promise, it is distinguishable from the bilateral
forward contract.
This solution is subjected to the objection that a unilateral
promise creates a moral obligation but it cannot be enforced,
according to Shari‘ah, by the courts of law. This leads us to
the question whether or not a one-sided promise is enforceable
in Shari‘ah. The general impression is that it is not, but
before accepting this impression at its face value, we will have
to examine it in the light of the original sources of Shari‘ah.
A thorough study of the relevant material in the books of
Islamic jurisprudence would show that the fuqaha’ (the Muslim
jurists) have different views on the subject. Their views may be
summarized as follows:
1. Many of them are of the opinion that 'fulfilling a
promise' is a noble quality and it is advisable for the promisor
to observe it, and its violation is reproachable, but it is
neither mandatory (wajib), nor enforceable through courts. This
view is attributed to Imam Abu Hanifah, Imam al-Shafi‘i, Imam
Ahmad and to some Maliki jurists 1 However as will be shown
later, many Hanafi and Maliki and some Shafi‘i‘ jurists do
not subscribe to this view.
2. A number of the Muslim jurists are of the view that
fulfilling a promise is mandatory and a promisor is under moral
as well as legal obligation to fulfil his promise. According to
them, promise can be enforced through courts of law. This view
is ascribed to Samurah b. Jundub
the well known companion of the Holy Prophet 
Umar b. Abdul Aziz, Hasan al-Basri, Sa‘id b. al-Ashwa‘,
Ishaq b. Rahwaih and Imam al-Bukhari. The same is the view of
some Maliki jurists, and it is preferred by Ibn-al-‘Arabi and
Ibn-al-Shat, and endorsed by al-Ghazzali, the famous Shafi‘i
jurist, who says the promise is binding, if it is made in
absolute terms. The same is the view of Ibn Shubrumah. The third
view is presented by some Maliki jurists. They say that in
normal conditions, promise is not binding, but if the promisor
has caused the promise to incur some expenses or undertake some
labor or liability on the basis of promise, it is mandatory on
him to fulfil his promise for which he may be compelled by the
courts.
Some contemporary scholars have claimed that the jurists who
have accepted the binding nature of a promise have done so only
with regard to unilateral gifts or other voluntary payments, but
none of them has accepted the binding nature of a promise to
effect a bilateral commercial or monetary transaction. However,
based on a close study, this notion does not seem to be correct,
because the Maliki and Hanafi jurists have allowed 'Bai‘ bil
wafa' on the basis of binding promise. Bai‘ bil wafa' is a
special kind of sale whereby the purchaser of an immovable
property undertakes that whenever the seller will give him the
price back, he will resell the house to him. The question of
validity of 'Bai‘bil wafa' has already been discussed in
detail in the first chapter while explaining the concept of
house financing on the basis of 'diminishing musharakah'. The
gist of the discussion is that if repurchase by the seller is
made a condition for the original sale, it is not a valid
transaction, but if the parties have entered into the original
sale unconditionally, but the seller has signed a separate and
independent promise to repurchase the sold property, this
promise will be binding on the promisor and enforceable through
the courts. The binding nature of the promise in this case has
been admitted by both Maliki and Hanafi jurists. 1
Obviously, this promise does not relate to a gift. It is a
promise to effect a sale in future. Still, the Maliki and Hanafi
jurists have accepted it as binding on the promisor and
enforceable through the courts. It is a clear proof of the fact
that the jurists who hold the promises to be binding do not
restrict it to the promises of gifts etc. The same principle is
applicable, according to them, to the promises whereby the
promisor undertakes to enter into a bilateral contract in
future.
In fact, the Holy Qur’an and the Sunnah of the Holy Prophet are
very particular about fulfilling promises. The Holy Qur’an
says:
And fulfil
the covenant. Surely, the covenant will be asked about (in the
Hereafter) (Bani Isra’il : 34)
O those who
believe, why do you say what you not do. It invites Allah's
anger that you say what you not do. (al-Saf:2 to 3)
Imam Abu Bakr
al-Jassas has said that this verse of the Holy Qur’an
indicates that if one undertakes to do something, no matter
whether it is a worship or a contract, it is obligatory on him
to do it. The Holy Prophet is
reported to have said:
There are three
distinguishing features of a hypocrite: when he speaks, tells a
lie, when he promises, he backs out and when he is given
something in trust, he breaches the trust. 2
This is only an
example. There is a large number of injunctions in the ahadith
of the Holy Prophet where
it is ordained to fulfil the promises and it is clearly
prohibited to back out, except for a valid reason.
Therefore, it is evident from these injunctions that fulfilling
promise is obligatory. However, the question whether or not a
promise is enforceable in courts depends on the nature of the
promise. There are certainly some sorts of promises which cannot
be enforced through courts. For example, at the time of
engagement the parties promise to go through the marriage. These
promises create a moral obligation, but obviously they cannot be
enforced through courts of law. But in commercial dealings,
where a party has given an absolute promise to sell or purchase
something and the other party has incurred liabilities on that
basis, there is no reason why such a promise should not be
enforced. Therefore, on the basis of the clear injunctions of
Islam, if the parties have agreed that this particular promise
will be binding on the promisor, it will be enforceable.
This is not a question pertaining to murabahah alone. If
promises are not enforceable in the commercial transactions, it
may seriously jeopardize commercial activities. If somebody
orders a trader to bring for him a certain commodity and
promises to purchase it from him, on the basis of which the
trader imports it from abroad by incurring huge expenses, how
can it be allowed for the former to refuse to purchase it? There
is nothing in the Holy Qur’an or Sunnah which prohibits the
making of such promises enforceable.
It is on these grounds that the Islamic Fiqh Academy Jeddah has
made the promises in commercial dealings binding on the promisor
with the following conditions,
(a) it should be one-sided promise.
(b) the promise must have caused the promise to incur some
liabilities
(c) If the promise is to purchase something, the actual sale
must take place at the appointed time by the exchange of offer
and acceptance. Mere promise itself should not be taken as the
concluded sale
(d) If the promisor backs out of his promise, the court may
force him either to purchase the commodity or pay actual damages
to the seller.1 The actual damages will include the actual
monetary loss suffered by him, but will not include the
opportunity cost.
On this basis, it is allowed that the client promises to the
financier that he will purchase the commodity after the latter
acquires it from the supplier. This promise will be binding on
him and may be enforced through courts in the manner explained
above. This promise does not amount to actual sale. It will be
simply a promise and the actual sale will take place after the
commodity is acquired by the financier for which exchange of
offer and acceptance will be necessary.
Securities Against Murabahah Price
Another issue regarding murabahah financing is that the
murabahah price is payable at a later date. The seller/financier
naturally wants to make sure that the price will be paid at the
due date. for this purpose, he may ask the client to furnish a
security to his satisfaction. The security may be in the form of
a mortgage or a hypothecation or some kind of lien or charge.
Some basic rules about this security must, therefore, be kept in
mind.
1. The security can be claimed rightfully where the
transaction has created a liability or a debt. No security can
be asked from a person who has not incurred a liability or debt.
As explained earlier, the procedure of murabahah financing
comprises of different transactions carried out at different
stages. In the earlier stages of the procedure, the client does
not incur a debt. It is only after the commodity is sold to him
by the financier on credit that the relationship of a creditor
and debtor comes into existence. Therefore, the proper way in a
transaction of murabahah would be that the financier asks for a
security after he has actually sold the commodity to the client
and the price has become due on him, because at this stage the
client incurs a debt. However, it is also permissible that the
client furnishes a security at earlier stages, but after the
murabahah price is determined. In this case, if the security is
possessed by the financier, it will remain at his risk, meaning
thereby that if it is destroyed before the actual sale to the
client, he will have either to pay the market price of the
mortgaged asset, and cancel the agreement of murabahah, or sell
the commodity required by the client and deduct the market price
of the mortgaged asset from the price of the sold property.
(2) It is also permissible that the sold commodity itself
is given to the seller as a security. Some scholars are of the
opinion that this can only be done after the purchaser has taken
its delivery and not before. It means that the purchaser shall
take its delivery, either physical or constructive, from the
seller, then give it back to him as mortgage, so that the
transaction of mortgage is distinguished from the transaction of
sale. However, after studying the relevant material, it can be
concluded that the earlier jurists have put this condition in
cash sales only and not in credit sales.
Therefore, it is not necessary that the purchaser takes the
delivery of the sold property before he surrenders it as
mortgage to the seller. The only requirement would be that the
point of time whereby the property is held to be mortgaged
should necessarily be specified, because from that point of
time, the property will be held by the seller in a different
capacity which should be clearly earmarked. For example, A sold
a car to B on first of january for a price of Rs. 500,000/- to
be paid on 30th June. A asked B to give a security for payment
at the due date. B has not yet taken delivery of the car and he
offered to A that he should keep the car as a mortgage from 2nd
January. If the car is destroyed before 2nd of January the sale
will be terminated and nothing will be payable by B. But if the
car is destroyed after the second of January, sale is not
terminated, but it will be subject to the rules prescribed for
the destruction of a mortgage. According to Hanafi jurists, in
this case, the seller will have to bear the loss of the car, to
the extent of its market price or its agreed sale price,
whichever is lesser. Therefore, if the market price of the car
was 450,000/- he can claim only the remaining part of the agreed
sale price (i.e. Rs. 50,000/- in the above example). If the
market price of the car is Rs. 500,000/- or higher, nothing can
be claimed from the purchaser.
This is the view of Hanafi School. The Shafi‘i and Hanbali
jurists hold that if the car is destroyed by the negligence of
the mortgagee, he will have to bear the loss, according to its
market price, but if the car is destroyed without any fault on
his part, he will not be liable to anything, and the purchaser
will bear the loss and will have to pay the full price.
It is clear from the above example that the possession of A over
the car as a seller carries effects and consequences different
from his possession as a mortgagee and therefore it is necessary
that the point of time on which the car is held by him as a
mortgagee should clearly be defined. Otherwise different
capacities will be mixed up giving rise to dispute and rendering
the security invalid.
Guaranteeing the Murabahah
The seller in a murabahah financing can also ask the
purchaser/client to furnish a guarantee from a third party. In
case of default in the payment of price at the due date, the
seller may have recourse to the guarantor, who will be liable to
pay the amount guaranteed by him. The rules of Shari'ah
regarding guarantee are fully discussed in the books of Islamic
fiqh. However, I would point out to two burning issues in the
context of Islamic banking.
1. The guarantor in the contemporary commercial atmosphere
does not normally guarantee a payment without a fee charged from
the original debtor. The classical Fiqh literature is almost
unanimous on the point that the guarantee is a voluntary
transaction and no fee can be charged on a guarantee. The most
the guarantor can do is to claim his actual secretarial expenses
incurred in offering the guarantee, but the guarantee itself
should be free of charge. The reason for this prohibition is
that the person who advances money to another person as a loan
cannot charge a fee for advancing a loan, because it falls under
the definition of riba or interest which is prohibited. The
guarantor should be subject to this prohibition all the more,
because he does not advance money. He only undertakes to pay a
certain amount on behalf of the original debtor in case he
defaults in payment. If the person who actually pays money
cannot charge a fee, how can fee be charged by a person who has
merely undertaken to pay and did not pay anything in actual
terms?
Suppose, A has borrowed 100 US dollars from B who asked him to
produce a guarantor. C says to A, "I pay off your debt to B
right now, but you will have to pay me 110 dollars at a later
date." Obviously 10 dollars charged from A are not allowed,
being interest. Then D comes to A and says, "I stand as a
guarantor to you, but you will have to pay me 10 dollars for
this service." If we allow to charge a fee for guarantee,
it will mean that C cannot charge 10 dollars, despite the fact
that he has actually paid the amount, and D can charge 10
dollars, despite the fact that he has merely committed himself
to pay only when A fails to pay. This being unfair apparently,
the classical Muslim jurists have forbidden the charging of a
fee for guarantee, so that both C and D, in the above example,
may stand on equal footing.
However, some contemporary scholars are considering the problem
from a different angle. They feel that guarantee has become a
necessity, especially in international trade where the sellers
and the buyers do not know each other, and the payment of the
price by the purchaser cannot be simultaneous with the supply of
the goods. There has to be an intermediary who can guarantee the
payment. It is utterly difficult to find the guarantors who can
provide this service free of charge in required numbers. Keeping
these realities in view, some Shari'ah scholars of our time are
adopting a different approach. They say that the prohibition of
guarantee fee is not based on any specific injunction of the
Holy Qur'an or the Sunnah of the Holy Prophet .
It has been deduced from the prohibition of riba as one of its
ancillary consequences. Moreover, guarantees in the past were of
simple nature. In today's commercial activities, the guarantor
sometimes needs a number of studies and a lot of secretarial
work. Therefore, they opine, the prohibition of the guarantee
fee should be reviewed in this perspective. The question still
needs further research and should be placed before a larger
forum of scholars. However, unless a definite ruling is given by
such a forum, no guarantee fee should be charged or paid by an
Islamic financial institution. Instead, they can charge or pay a
fee to cover expenses incurred in the process of issuing a
guarantee.
Penalty of Default
Another problem
in murabahah financing is that if the client defaults in payment
of the price at the due date, the price cannot be increased. In
interest-based loans, the amount of loan keeps on increasing
according to the period of default. But in murabahah financing,
once the price is fixed, it cannot be increased. This
restriction is sometimes exploited by dishonest clients who
deliberately avoid to pay the price at its due date, because
they know that they will not have to pay any additional amount
on account of default.
This characteristic of murabahah should not create a big problem
in a country where all the banks and financial institutions are
run on Islamic principles, because the government or the central
bank may develop a system where such defaultors may be penalized
by depriving them from obtaining any facility from any financial
institution. This system may serve a a deterrent against
deliberate defaults. However, in the countries where the Islamic
banks and financial institutions are working in isolation from
the majority of financial institutions run on the basis of
interest, this system can hardly work, because even if the
client is deprived to avail of a facility from an Islamic bank,
he can approach the conventional institutions.
In order to solve this problem, some contemporary scholars have
suggested that the dishonest clients who default in payment
deliberately should be made liable to pay compensation to the
Islamic bank for the loss it may have suffered on account of
default. They suggest that the amount of this compensation may
be equal to the profit given by that bank to its depositors
during the period of default. For example, the defaulter has
paid the price three months after the due date. If the bank has
given to its depositors a profit at the rate of 5%, the client
has to pay 5% more as compensation for the loss of the bank.
However, the scholars who allow this compensation make it
subject to the folowing conditions:
(a) The defaulter should be given a grace period of at least
one month after the maturity date during which he must be given
weekly notices warning him that he should pay the price,
otherwise he will have to pay compensation.
(b) It is proved beyond doubt that the client is
defaulting without valid excuse. If it appears that his default
is due to poverty, no compensation can be claimed from him.
Indeed, he must be given respite until he is able to pay,
because the Holy Qur’an has expressly said,
And if he (the
debtor) is short of funds, then he must be given respite until
he is well off. (2:280)
(c) The
compensation is allowed only if the investment account of the
Islamic bank has earned some profit to be distributed to the
depositors. If the investment account of the bank has not earned
profit during the period of default, no compensation shall be
claimed from the client.
This concept of compensation, however, is not accepted by the
majority of the present day scholars. (including the author). It
is the considered opinion of such scholars that this suggestion
neither conforms to the principles of Shariah nor is it able to
solve the problem of default.
First of all, any additional amount charged from a debtor is
riba. In the days of jahiliyyah (before Islam) the people used
to charge additional amounts from their debtors when they were
not able to pay at the due date. they used to say,
Either you pay
off the debt or you increase the payable amount.
The
aforementioned suggestion of paying compensation to the
creditor/seller resembles the same attitude.
It can be
argued that the above suggestion is theoretically different from
the practice of jahilliyah in that the suggestion is to grant
the debtor a grace period of one month to make sure that he is
avoiding payment without a valid cause and to exempt him from
compensation if it appears that his non-payment is due to
poverty or a hardship. But in practical application of the
concept, these conditions are hardly fulfilled, because every
debtor may claim that his default is due to his financial
inability at the due date, and it is very difficult for a
financial institution to hold an inquiry about the financial
position of each client and to verify whether or not he was able
to pay. What the banks normally do is that they presume that
every client was able to pay unless he has been declared as
bankrupt or insolvent. It means that the concession allowed in
the suggestion can be enjoyed only by the insolvent people.
Obviously, insolvency is a rare phenomenon, and in this rare
situation, even the interest-based banks cannot normally recover
interest from the borrower. Therefore, the suggestion leaves no
practical and meaningful difference between an interest based
financing and an Islamic financing.
So far as grace period is concerned, it is a minor concession
which is sometimes given by the conventional banks as well. Once
again, in practical terms, there is no material difference
between interest and the late payment charged as compensation.
It is argued in favor of charging compensation that the Holy
Prophet ?
has condemned the person who delays the payment of his dues
without a valid cause. According to the well-known hadith he has
said,
The well-off
person who delays the payment of his debt, subjects himself to
punishment and disgrace."
The argument
runs that the Holy Prophet ? has permitted to inflict a
punishment on such a person. The punishments may be of different
kinds, including the imposition of a monetary penalty. But this
argument overlooks the fact that even if it is assumed that
imposing fine or a monetary penalty is allowed in Shariah,1 it
is imposed by a court of law and is normally paid to the
government. Nobody has allowed a situation where an aggrieved
party imposes the fine on its own (and for its own benefit)
without a judgment of a court, competent to decide the matter.
Moreover, had it been a recognized punishment, it should have
been imposed even if the investment account has earned no profit
during that period, because the guilt of the defaulter is
established and it has no nexus with the profit of the
investment account of the bank.
In fact, the suggestion of compensation equal to the rate of
profit of the investment account is based on the concept of
opportunity cost of money. This concept is foreign to the
principles of Shariah. Islam does not recognize opportunity cost
of money, because after the elimination of interest from the
economy, money has no definite return. It is always exposed to
loss as well as it has the ability to earn a profit. And it is
the risk of loss which makes it entitled to gain a return.
Another point is worth attention. The one who defaults in
payment of debt is, at the most, like a thief or a usurper. But
the study of the rules prescribed for theft and usurpation would
show that a thief has been subjected to very severe punishment
of amputating his hands, but he was never asked to pay an
additional mount to compensate the victim of theft. Similarly,
if a person has usurped the money of another person, he may be
punished by way of ta‘zir, but no Muslim jurist has ever
imposed on him a financial penalty to compensate the owner.
Imam al-Shafi’i is of the view that if someone usurps the land
of another person, he will have to pay the rent of the land
according to the market rate. But if he has usurped money, he
will return the equal amount of money and not more.
All these rules go a long way to prove that the opportunity cost
of money is never recognized by the Islamic Shari‘ah, because,
as explained above, money has no definite return, nor any
intrinsic utility.
On the basis of what is stated above, the idea of compensation
to be charged from a defaulter is not approved by most of the
contemporary scholars. The question was thoroughly discussed in
the annual session of Islamic Fiqh Academy, Jeddah, and it was
resolved that no such compensation is allowed in Shariah.
All this discussion relates to the impermissibility of the
proposed compensation in Shariah. Now it is to be noted that
this proposal does not solve the problem of default at all. To
the contrary, it may encourage the debtors to commit as much
default as they wish. The reason is that, according to this
suggestion, the defaulter is asked to pay compensation equal to
the return earned by the depositors during the period of
default. It is evident that the rate of return earned by the
depositors is always less than the rate of profit paid by the
customer in a Murabahah transaction. Therefore, the customer
will be paying after default, much less than he was paying
before the default. Therefore, he would willingly accept to pay
this amount and not pay the amount of price which he will invest
in a more profitable activity. Suppose the rate of profit agreed
in a murabahah transaction of six moths is 15% p.a. and the rate
of profit declared to the depositors is 10%. p.a. It means that
if the client withholds the price of murabahah after its
maturity date and keeps it for another six months, he will have
to pay the compensation at the rate of 10% p.a. which is much
less than the rate of original murabahah (i.e. 15%). As such he
will default and enjoy another facility for the next six months
at a lesser rate.
This proposal, therefore, is not only against Shariah, but also
deficient in meeting the problem of default. The Alternative
suggestion The question now arises as to how the banks and
financial institutions may solve this problem. If nothing is
charged from the defaulters, it may be a greater incentive for a
dishonest person to default continuously. Here is the answer to
this question:
We have already mentioned that the real solution to this problem
is to develop a system where the defaulters are duly punished by
depriving them from enjoying a financial facility in future.
However, as commented earlier, this may be only where the whole
banking system is based on Islamic principles, or the Islamic
banks are given due protection against defaulters. Therefore, up
to a time when this goal is reached, we may need some other
alternative.
For this purpose it was suggested that the client, when entering
into a murabahah transaction, should undertake that in case he
defaults in payment at the due date, he will pay a specified
amount to a charitable fund maintained by the bank. It must be
ensured that no part of this amount shall form part of the
income of the bank. However, the bank may establish a charitable
fund for this purpose and all amounts credited therein shall be
exclusively used for purely charitable purpose approved by the
Shari‘ah. The bank may also advance interest-free loans to the
needy persons from this charitable fund.
This proposal is based on a ruling given by some Maliki jurists
who say that if a debtor is asked to pay an additional amount in
case of default, it is not allowed by Shari'ah, because it
amounts to charging interest. However, in order to assure the
creditor of prompt payment, the debtor may undertake to give
some amount in charity in case of default. This is, in fact, a
sort of Yamin (vow) which is a self-imposed penalty to keep
oneself away from default. Normally, such 'vows' create a moral
or religious obligation and are not enforceable through courts.
However, some Maliki jurists allow can be made it justiceable,
and there is nothing in the Holy Qur'an or in the Sunnah of the
Holy Prophet which
forbids making this 'vow' enforceable through the courts of law.
Therefore, in cases of genuine need, this view can be acted
upon. But, while implementing this proposal, the following
points must be kept in mind.
1. The proposal is meant only to pressurize the debtors on
paying their dues promptly and not to increase the income of the
creditor / financier, nor to compensate him for his opportunity
cost. Therefore, it must be ensured that no part of the penalty
forms part of the income of the bank in any case, nor can it be
used to pay taxes or to set-off any liability of the financier.
2. Since the amount of penalty is not deserved by the
financier as his income, but it goes to charity, it may be any
amount willfully undertaken by the debtor. It can also be
determined on per cent per annum basis. Therefore, it may serve
as a real deterrent against deliberate default, unlike the
former suggestion of compensation which, as explained earlier,
may tend to encourage the defaults.
3. Since the penalty undertaken by the client is originally
a self-undertaken vow, and not penalty charged by the financier,
the agreement should reflect this concept. Therefore, the proper
wording of the penalty clause would be on the following pattern,
"The client hereby undertakes that if he defaults in
payment of any of his dues under this agreement, he shall pay to
the charitable account/fund maintained by the Bank/Financier a
sum calculated on the basis of ...% per annum for each day of
default unless he establishes through the evidence satisfactory
to the Bank/financier that his non-payment at the due date was
caused due to poverty or some other factors beyond his
control."
4. Being a vow of charitable act, it was originally
permissible for the client to give the stipulated amount to any
charity of his own choice, but in order to ensure that he will
pay, the charitable account or fund maintained by the
financier/bank is specified in the proposed undertaking. This
specific undertaking does not violate any principle of Shariah.
However, it is necessary that the bank or the financial
institution maintains a separate fund, or at least, a separate
account for this purpose and the amounts credited to that
account must be spent in well-defined charities known to the
client/debtor.
This proposal has now been implemented successfully in a large
number of Islamic financial institution.
No Roll Over in Murabahah
Another rule which must be remembered and fully complied with is
that murabahah transaction cannot be rolled over for a further
period. In an interest-based financing, if a customer of the
bank cannot pay at the due date for any reason, he may request
the bank to extend the facility for another term. If the bank
agrees, the facility is rolled over on the terms and conditions
mutually agreed at that point of time, whereby the newly agreed
rate of interest is applied to the new term. It actually means
that another loan of the same amount is re-advanced to the
borrower.
Some Islamic banks or financial institutions, who misunderstood
the concept of murabahah and took it as merely a mode of
financing analogous to an interest-based loan, started using the
concept of roll-over to murabahah also. If the client requests
them to extend the maturity date of murabahah, they roll it over
and extend the period of payment on an additional mark-up
charged from the client which practically means that another
separate murabahah is booked on the same commodity. This
practice is totally against the well-settled principles of
Shariah.
It should be clearly understood that murabahah is not a loan. It
is the sale of a commodity the price of which is deferred to a
specific date. Once the commodity is sold, its ownership is
passed on to the client. It is no more a property of the seller.
What the seller can legitimately claim is the agreed price which
has become a debt payable by the buyer. Therefore, there is no
question of effecting another sale on the same commodity between
the same parties. The roll-over in murabahah is nothing but
interest pure and simple because it is an agreement to charge an
additional amount on the debt created by the murabahah sale.
Rebate on
earlier payment
Sometimes the debtor wants to pay earlier than the specified
date. In this case he wants to earn a discount on the agreed
deferred price. Is it permissible to allow him a rebate for his
earlier payment? This question has been discussed by the
classical jurists in detail. The issue is known in the Islamic
legal literature as " "
(Give discount and receive soon). Some earlier jurists have held
this arrangement as permissible, but the majority of the Muslim
jurists, including the four recognized schools of Islamic
jurisprudence do not allow it, if the discount is held to be a
condition for earlier payment.
The view of those who allow this arrangement is based on a
hadith in which
Abdullah ibn is
reported to have said that when the Jews belonging to the tribe
of Banu Nadir were banished from Madinah (because of their
conspiracies) some people came to the Holy Prophet ? and said,
"You have ordered them to be expelled, but some people owe
them some debts which have not yet matured." Thereupon the
Holy Prophet said
to them (i.e., the Jews who were the creditors)
Give discount
and receive (your debts) soon.
The majority of
the Muslim jurists, however, does not accept this hadith as
authentic. Even Imam al-Baihaqi, who has reported this hadith in
his book, has expressly admitted that this is a weak narration.
Even if the hadith is held to be authentic, the exile of Banu
Nadir was in the second year after hijrah, when riba was not yet
prohibited.
Moreover, al-Waqidi has mentioned that Banu Nadir used to
advance usurious loans. Therefore, the arrangement allowed by
the Holy Prophet was
that the creditors forego the interest and the debtors pay the
principal sooner. Al-Waqidi has narrated that Sallam b. Abi
Huqaiq, a Jew of Banu Nadir, had advanced eighty dinars to Usaid
Ibn Hudayr payable
after one year with an addition of 40 dinars. Thus,
Usaid owed
him 120 dinars after one year. After this arrangement, he paid
the principal amount of 80 dinars and Sallam withdrew from the
rest.
For these reasons, the majority of the jurists hold that if the
earlier payment is conditioned with discount, it is not
permissible. However, if this is not taken to be a condition for
earlier payment, and the creditor gives a rebate voluntarily on
his own, it is permissible.
The same view is taken by the Islamic Fiqh Academy in its annual
session.
It means that in a murabahah transaction effected by an Islamic
bank or financial institution, no such rebate can be stipulated
in the agreement, nor can the client claim it as his right.
However, if the bank or a financial institution gives him a
rebate on its own, it is not objectionable, especially where the
client is a needy person. For example, if a poor farmer has
purchased a tractor or agricultural inputs on the basis of
murabahah, the bank should give him a voluntary discount.
Calculation of Cost in Murabahah
It is already mentioned that the transaction of murabahah
contemplates the concept of cost-plus sale, therefore, it can be
effected only where the seller can ascertain the exact cost he
has incurred in acquiring the commodity he wants to sell. If the
exact cost cannot be ascertained, no murabahah can be possible.
In this case, the sale must be effected on the basis of
musawamah (i.e. sale without reference to cost).
This principle leads to another rule: the murabahah transaction
should be based on the same currency in which the seller has
purchased the commodity from the original supplier. If the
seller has purchased it for Pakistani rupees, the onward sale to
the ultimate purchaser should also be based on Pakistani rupees,
and if the first purchase has occurred in U.S. dollars, the
price of murabahah should be based on dollars as well, so that
the exact cost may be ascertained.
However, in the case of international trade, it may be difficult
to base both purchases on the same currency. If the commodity
intended to be sold to the customer is imported from a foreign
country, while the ultimate purchaser is in Pakistan, the price
of the original sale has to be paid in a foreign currency and
the price of the second sale will be determined in Pak. Rupees.
This situation may be met with in two ways. Firstly, if the
ultimate purchaser agrees and the laws of the country allow, the
price of the second sale may also be determined in dollars.
Secondly, if the seller has purchased the commodity by
converting Pakistani Rupees into dollars, the exact amount of
Pak rupees paid by the seller to convert them into dollars can
be taken as the cost price and the profit of murabahah can be
added thereon.
In some cases, the bank purchases the commodity from abroad at a
price payable after three months or in different installments,
and sells the commodity to his client before he pays the full
price to the supplier. Since he pays the price in dollars, its
equivalent in Pakistani Rupees are not known at the time when
the commodity is sold to the client. Due to fluctuation in the
price of dollars in Pak Rupees, the bank may have to pay more
than it anticipated at the time of murabahah sale. For example,
the rate of U.S. dollars at the time of murabahah was Rs. 40/-
for one dollar. The price of murabahah was settled according to
this rate, but when the bank paid the price to the supplier, the
dollar rate increased to Rs. 41/- for one dollar, meaning
thereby that the cost of the bank increased by 2.5%. In order to
meet this situation, some financial institutions put a condition
in the murabahah agreement that in case of such fluctuation in
currency rates, the client shall bear the additional cost.
According to the classical Muslim jurists, murabahah based on
this condition is not valid because it leads to uncertainty of
the price at the time of sale. Such uncertainty continues upto a
date after three months when the buyer actually pays the price
to the supplier. Such uncertainty renders the transaction
invalid. Therefore, there are following options open to the bank
in this issue:
(a) The bank should purchase that commodity on the basis of
L/C at sight and should pay the price to the supplier before
effecting sale with the customer. In this case no question of
fluctuation in currency rates will be involved. The murabahah
price can be determined on the basis of the market rate of
dollars on the date when the bank has paid the price to the
supplier.
(b) The bank determines the murabahah price in US dollars
rather than in Pak rupees, so that the deferred murabahah price
is paid by the customer in dollars. In this case the bank will
be entitled to receive dollars from the customer and the risk of
the fluctuation in dollar's price will be borne by the
purchaser.
(c) Instead of murabahah, the deal may be on the basis of
musawamah (a sale without reference to the cost of the seller)
and the price may be fixed as to cover the anticipated
fluctuation in the currency rates.
Subject - matter of Murabahah
All commodities which may be subject matter of sale with profit
can be subject matter of murabahah, because it is a particular
kind of sale. Therefore, the shares of a lawful company may be
sold or purchased on murabahah basis, because according to the
Islamic principles, the shares of a company represent the
holder's proportionate ownership in the assets of the company.
If the assets of a company can be sold with profit, its shares
can also be sold by way of murabahah. But it goes without saying
that the transaction must fulfil all the basic conditions,
already discussed, for the validity of a murabahah transaction.
Therefore, the seller must first acquire the possession of the
shares with all their rights and obligations, then sell them to
his client. A buy back arrangement or selling the shares without
taking their possession is not allowed at all.
Conversely, no murabahah can be effected on things which cannot
be subject - matter of sale, For example murabahah is not
possible in exchange of currencies, because it must be
spontaneous or, if deferred, on the market rate prevalent on the
date of the transaction.1 Similarly, the commercial papers
representing a debt receivable by the holder cannot be sold or
purchased except at par value, and therefore no murabahah can be
effected in respect of such papers. Similarly, any paper
entitling the holder to receive a specified amount of money from
the issuer cannot be negotiated. The only way of its sale is to
transfer if for its face value. Therefore, they cannot be sold
on murabahah basis.
Rescheduling of payments in murabahah
If the purchaser/client in murabahah financing is not able to
pay according to the dates agreed upon in the murabahah
agreement, he sometimes requests the seller / the bank for
rescheduling the installments. In conventional banks, the loans
are normally rescheduled on the basis of additional interest.
This is not possible in murabahah payments. If the installments
are rescheduled, no additional amount can be charged for
rescheduling. The amount of the murabahah price will remain the
same in the same currency.
Some Islamic banks proposed to reschedule the murabahah price in
a hard currency different from the one in which the original
sale took place. This was proposed to compensate the bank
through appreciation of the value of the hard currency. Since
this benefit was proposed to be drawn from rescheduling, it is
not permissible. Rescheduling must always be on the basis of the
same amount in the same currency. At the time of payment
however, the purchaser may pay with the consent of the seller,
in a different currency on the basis of the exchange rate of
that day (i.e. the day of payment) and not the rate of the date
of transaction.
Securitization of murabahah
Murabahah is a transaction which cannot be securitized for
creating a negotiable instrument to be sold and purchased in
secondary market. The reason is obvious. If the purchaser/client
in a murabahah transaction signs a paper to evidence his
indebtedness towards the seller/financier, the paper will
represent a monetary debt receivable from him. In other words,
it represents money payable by him. Therefore transfer of this
paper to a third party will mean transfer of money. It has
already been explained that where money is exchanged for money
(in the same currency) the transfer must be at par value. It
cannot be sold or purchased at a lower or a higher price.
Therefore, the paper representing a monetary obligation arising
out of a murabahah transaction cannot create a negotiable
instrument. If the paper is transferred, it must be at par
value. However, if there is a mixed portfolio consisting of a
number of transactions like musharakah, leasing and murabahah,
then this portfolio may issue negotiable certificates subject to
certain conditions more fully discussed in the chapter of
"Islamic Funds".
Some Basic Mistakes In Murabahah Financing
After explaining the concept of murabahah and its relevant
issues, it will be pertinent to highlight some basic mistakes
often committed by the financial institutions in the practical
implementation of the concept.
1. The first and the most glaring mistake is to assume that
murabahah is a universal instrument which can be used for every
type of financing offered by conventional interest-based banks
and NBFIs. Under this false assumption, some financial
institutions are found using murabahah for financing overhead
expenses of a firm or company like paying salaries of their
staff, paying the bills of electricity etc. and setting off
their debts payable to other parties. This practice is totally
unacceptable, because murabahah can be used only where a
commodity is intended to be purchased by the customer. If funds
are required for some other purpose, murabahah cannot work. In
such cases, some other suitable modes of financing, like
musharakah, leasing etc. can be used according to the nature of
the requirement.
2. In some cases, the clients sign the murabahah documents
merely to obtain funds. They never intend to employ these funds
to purchase a specific commodity. They just want funds for
unspecified purpose, but to satisfy the requirement of the
formal documents, they name a fictitiously commodity. After
receiving money, they use it for whatever purpose they wish.
Obviously this is a fictitious deal, and the Islamic financiers
must be very careful about it. It is their duty to make sure
that the client really intends to purchase a commodity which may
be subject to murabahah. This assurance must be obtained by the
authorities sanctioning the facility to the customer. Then, all
necessary steps must be taken to confirm that the transaction is
genuine. For example:
(a) Instead of giving funds to the customer, the purchase
price should be paid directly to the supplier.
(b) If it becomes necessary that the client is entrusted
with funds to purchase the commodity on behalf of the financier,
his purchase should be evidenced by invoices or similar other
documents which he should present to the financier.
(c) Where either one of the above two requirements is not
possible to be fulfilled, the financing institution should
arrange for physical inspection of the purchased commodities.
Anyhow, the Islamic financial institutions are under an
obligation to make sure that murabahah is a real and genuine
transaction of actual sale and is not being misused to
camouflage an interest-based loan.
3. In some cases, sale of commodity to the client is
effected before the commodity is acquired from the supplier.
This mistake is invariably committed in transactions where all
the documents of murabahah are signed at one time without taking
into account various stages of the murabahah. Some institutions
have only one murabahah agreement which is signed at the time of
disbursement of money, or in some cases, at the time of
approving the facility. This is totally against the basic
principles of murabahah. It has already been explained in this
article that the murabahah arrangement practiced by the banks is
a package of different contracts which come into play one after
another at their respective stages. These stages have been fully
highlighted earlier while discussing the concept of 'Murabahah
Financing'. Without observing this basic feature of murabahah
financing, the whole transaction turns into an interest-bearing
loan. Merely changing the nomenclature does not make it lawful
in the eyes of Shariah.
The representatives of the Shariah Boards of the Islamic banks,
when they check the transactions of the bank with regard to
their compliance with Shariah, must make sure that all these
stages have been really observed, and every transaction is
effected at its due time.
4. International commodity transactions are often
resorted to for liquidity management. Some Islamic banks feel
that these transactions, being asset-based, can easily be
entered into on murabahah basis, and they enter the field
ignoring the fact that the commodity operations as in vogue in
the international markets, do not conform to the principles of
Shariah. In many cases, they are fictitious transactions where
no delivery takes place. The parties end up paying differences.
In some cases, there are real commodities but they are subjected
to forward sales or short sales which are not allowed in Shariah.
Even if the transactions are restricted to spot sales, they
should be formulated on the basis of Islamic principles of
Murabahah by fulfilling all the necessary conditions already
mentioned in this book.
5. It is observed in some financial institutions that they
effect murabahah on commodities already purchased by their
clients from a third party. This is again a practice never
warranted by the Shariah. Once the commodity is purchased by the
client himself, it cannot be purchased again from the same
supplier. If it is purchased by the bank from the client himself
and is sold to him, it is a buy-back technique which is not
allowed in Shariah, especially in murabahah. In fact, if the
client has already purchased a commodity, and he approaches the
bank for funds, he either wants to set-off his liability towards
his supplier, or he wants to use the funds for some other
purpose. In both cases an Islamic bank cannot finance him on the
basis of murabahah. Murabahah can be effected only on
commodities not yet purchased by the client.
Conclusions:
From the foregoing discussion on different aspects of murabahah
financing, the following conclusions may be summarized as the
basic points to remember:
1. Murabahah is not a mode of financing in its origin. It is
a simple sale on cost-plus basis. However, after adding the
concept of deferred payment, it has been devised to be used as a
mode of financing only in cases where the client intends to
purchase a commodity. Therefore, it should neither be taken as
an ideal Islamic mode of financing, nor a universal instrument
for all sorts of financing. It should be taken as a transitory
step towards the ideal Islamic system of financing based on
musharakah or mudarabah. Otherwise its use should be restricted
to areas where musharakah or mudarabah cannot work.
2. While approving a murabahah facility, the sanctioning
authority must make sure that the client really intends to
purchase commodities which may be subject-matter of murabahah.
It should never be taken as merely a paper-work having no
genuine basis.
3. No murabahah can be effected for overhead expenses,
paying the bills or settling the debts of the client, nor can it
be effected for purchase of currencies.
4. It is the foremost condition for the validity of
murabahah that the commodity comes in the ownership and physical
or constructive possession of the financier before he sells it
to the customer on murabahah basis. There should be a time in
which the risk of the commodity is borne by the financier.
Without having its ownership or assuming the risk of the
commodity, though for a short while, the transaction is not
acceptable to Shariah and the profit accruing therefrom is not
halal.
5. The best way to effect murabahah is that the financier
himself purchases the commodity directly from the supplier and
after taking its delivery sells it to the client on murabahah
basis. Making the client agent to purchase on behalf of the
financier renders the arrangement dubious. For this very reason
some Shariah Boards have forbidden this technique, except in
cases where direct purchase is not possible at all. Therefore,
the agency concept should be avoided as far as possible.
6. If in cases of genuine need, the financier appoints the
client his agent to purchase the commodity on his behalf, his
different capacities (i.e. as agent and as ultimate purchaser)
should be clearly distinguished. As an agent, he is a trustee,
and unless he commits negligence or fraud, he is not liable to
any loss so far as the commodity is in his possession as agent
of the financier. After he purchases the commodity in his
capacity as agent, he must inform the financier that, in
fulfilling his obligation as his agent, he has taken delivery of
the purchased commodity and now he extends his offer to purchase
it from him. When, in response to this offer, the financier
conveys his acceptance to this offer, the sale will be deemed to
be complete, and the risk of the property will be passed on to
the client as purchaser. At this point, he will become a debtor
and the consequences of indebtedness will follow. These are the
necessary requirements of murabahah financing which can never be
dispensed with. While describing the concept of "Murabahah
as a mode of financing" we have already identified five
stages of murabahah under agency agreement. Each and every step
out of these five is necessary in its own right and neglecting
any one of them renders the whole arrangement unacceptable.
It should be noted with care that murabahah is a border-line
transaction and a slight departure from the prescribed procedure
makes it step in the prohibited area of interest-based
financing. Therefore this transaction must be carried out with
due diligence and no requirement of Shari‘ah should be taken
lightly.
7. Two different prices for cash and credit sales are
allowed on condition that either of the two options is
specifically elected by the customer. Once the price is fixed,
it can neither be increased because of late payment, nor
decreased on earlier payment.
8. In order to assure that the purchaser will pay the price
promptly, he may undertake that in case of default, he will pay
a certain amount to the charitable fund maintained by the
financing institution. This amount may be based on per cent per
annum concept, but it must invariably be spent for purely
charitable purposes and should in no case form part of the
income of the institution.
9. In case of earlier payment, no rebate can be claimed by
the client. However, the institution may at it own option,
forego some part of the price without making it a pre-condition
in the agreement.
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