Benchmarking in Islamic Finance: Issues and Challenges

Topics: Muhammad, Sharia, Islamic banking Pages: 4 (1512 words) Published: June 14, 2013
Introduction:
In Islam, fixing the price of commodities is not allowed as the increase of the price is caused by practice of supply and demand in the market. Hence in this case, benchmarking for the products is not allowed. It is can be reflected from of the Hadith of Prophet Muhammad S.A.W. Narrated by Anas Ibn Malik,

“The people said: Apostle of Allah, prices has shot up, so fix prices for us. Thereupon the Apostle of Allah (PBUH) said: “Verily, Allah S.W.T. determines the climate of economic affluence and gloom. I do not want to take any action to fix the prices because I do not want, later in hereafter, any among you to demand for the return of your property and blood from me because of my tyranny (in fixing the prices).” In the above hadith, the practice of fixing price is clearly condemned by Prophet Muhammad S.A.W. The Prophet S.A.W declared the act of fixing price as injustice towards the seller if the price is fluctuated due to the normal market forces. But the second school of taught disagree with not fixing the price. They argued that the fluctuation in the price of commodities at the time of Prophet Muhammad S.A.W was due the normal market forces i.e. supply and demand of the commodity in the market. But nowadays the prices fluctuate more due to seller’s speculation rather than supply and demand of the product. In this case the price of the commodities should be fixed by the authorities. Hence benchmarking in this case is allowable by the Scholars. In financial industry, several different methods of pricing business loans have appeared over the years including cost-plus loan pricing, price leadership loan pricing, below-prime loan pricing, and costumer profitability analysis. Many business loans today are priced directly of money market interest rates, with narrow profit margins reflecting intense competition for the best business customers. Some of the profit/interest rates used in the market is as follows: (1) Overnight Policy Rate (OPR); (2)...


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