Topics: Debt, Islamic banking, Debtor Pages: 5 (1313 words) Published: October 26, 2011
Murabaha - as a mode of finance
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:

1. 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.

2. 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

1. 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.

2. Being a sale and not a loan, murabahah should fulfill all the conditions     necessary for a valid sale.

3. The financier must have a good title to the commodity before he sells it to     his client.

4. 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.

5. 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.

6. 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.

7. In the light of the aforementioned principles, a financial institution can use     the Murabahah mode of financing by adopting the following procedure: Firstly, | 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...
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