Murabahah

Introduction The main purpose of Murabahah and Tawliyah sales is the protection of the unskilled general consumers, who lack expertise and skill in the various kinds of goods or commodities. Due to his lack of skill, the purchaser needs and is forced to place absolute confidence in the words of the seller, who is skillful in the business. Thus the seller has to be just and truthful to his words and to abstain from any fraud or its semblance. After basing the sales price on the original cost of the goods to the seller, the purchaser is provided with a degree of protection against unjust exploitation by unscrupulous merchants. The main consideration is to eliminate the possibility of dishonest and unjustified enrichment. The seller transfers the ownership of his property, which he had acquired at a certain price to the buyer with an agreed increment to the price. The purchaser buys the goods from the seller by giving him some profit. Thus Murabahah is a contract with a set increment on the original price agreed upon by the two parties.

Murabahah may also be explained with reference to a relationship that exists between a wholesaler and retailer. A retailer may sell a certain thing at a certain profit added to the original cost. A purchaser may be willing to pay a retailer, who is at hand, a specified surcharge on the cost of certain goods in order to prevent himself from any

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trouble of buying them form a wholesaler. A retailer buys the commodities in bulk from the wholesaler and resells them item wise at a certain price which would include the original price and the profit. The profit is made to cover the cost of maintaining, storage and transportation. The profit made could also be used to pay employees who looked after the goods. Whether to include these costs in the original price or to deduct them from the profit depend on the agreement between the parties.

Definition Murabahah is derived from the root word which literally means profit. Murabahah sale is defined as selling a commodity for its purchase price plus a specified mark-up or profit agreed upon. The mark-up may be a lump sum or a certain percentage of the purchase price. Thus, murabahah is the resale of a thing at some profit added on the original cost.

Murabahah is a trust transaction. If the seller in a Murabahah transaction is guilty of any deception, the purchaser is at liberty to reject the thing or to take the full price stipulated. If the article perishes before the purchaser returns it, or anything happens to it which would prevent cancellation of the sale on discovery of the deception, the purchaser is liable for the full price mentioned, and is without any option.

Price and the Profit The price and profit should be known. The profit can be a lump sum or based on percentage. For example, the thing can be sold at a relative profit, as eleven for ten or 10% profit. It signifies a profit of one in ten, two in twenty, and three in thirty. Expense incurred
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on transportation, storage, etc or any other expenses the addition of which is customarily accepted may lawfully be added to the original cost.

When a person purchases a thing on credit, he cannot lawfully sell it by Murabahah without informing the buyer of the fact. It is because when a property is bought on credit its price is necessarily higher than the cash price

Conditions for Murabahah The most important conditions of the murabahah sale are as follows: a) The buyer has to know the original price of the commodity including all the

expenses.
b)

The profit to seller must be declared to the buyer whether it is a certain fixed

amount of money or a percentage of the original price. c) The first contract (first sale) must be legitimate from the point of view of shariah;

otherwise, the murabahah contract will be cancelled.

If the commodity was inflicted by any defects, the seller has to inform the buyer

about it, because murabahah sale is a trust sale and the seller should not betray his buyer. If, however, the buyer discovers that the seller has betrayed him he either for a compensation or a cancellation of the sale.
e)

Murabahah is not allowed with regard to the ribawi properties. Any exchange of

ribawi properties should be like for like and on the spot. As such the sale of, for instance, 10 kg of rice for 15 kg is not allowed. Any increase or delay in exchange of ribawi commodities amount to usury.

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Murabahah in Islamic Banking Murabahah sale can be ordinary Murabahah when the seller buys a commodity without depending of a prior promise of purchase and offers the commodities for a Murabahah sale for its price and a profit to be agreed upon. Murabahah sale can also be connected with a promise where three parties could be involved. These could be the seller, the buyer, and the bank. The bank does not purchase the property unless the buyer specifies the commodity and promises to buy it. The bank undertakes to purchase the commodity as requested by the customer and resell it to him for the cost price plus a margin of profit previously agreed upon during the promise stage. The payment would be settled by the customer within an agreed time frame either in lump sum or installments.

The bank would have to sign two separate contracts, one with the supplier and the other with the customer. It is necessary that the commodity should be in the possession of the bank before the sale contract with the other party is concluded. Any risk prior to the delivery should be borne by the bank until the ownership is transferred to the customer. The practical steps of the Murabahah sale are:

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The purchaser identifies the commodity and requests the seller to send a quotation. The bank studies the request, and negotiates the selling price, mode of payment,

duration of instalments, and other conditions and securities. The purchaser promises to buy the commodity from the bank on the basis of Murabahah. 3If the banks aggress it will notify the purchaser and buys the commodity. The seller

approves the sale and sends the invoice.

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4-

The bank and the purchaser sign the Murabahah sale contract in accordance with

the promise already agreed upon.

In addition to the conditions mentioned earlier the following conditions should be observed when Islamic banks practice Murabahah.
a)

The bank should acquire ownership and possession of the goods prior to its sale to

the customer.
b)

The bank must carry the risk of loss before delivery, or the consequences of

rejection of the goods by the buyer because of concealed defects.

Promise from any of the two parties of the contract is morally binding on both the

parties. However, if the bank while relying on the promise takes the necessary steps to acquire the property the promise becomes legally binding. The promise is needed as the customer may refuse to purchase the property. On the other hand, the bank cannot enter into a valid contract as it does not have the property. d) The mutual promise may be valid subject to the condition that each of the two

parties must have the option.

Murabahah can also be used to finance foreign trade. The risk of the transaction is born by the bank until the possession is transferred to the customer. The transaction should not be one of remitting the account from the supplier on behalf of the purchaser as it will amount to interest. The bank should actually buy the goods and continue to be responsible until they are delivered to the customer. The bank should act as a trader and not a financier.

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Profit in this context is justified since it is derived from the buying and selling transaction as opposed to interests accruing from the principal lent out.

Comparison of Murabahah as Practised by Islamic banks and Interest-based Loans 1. Murabahah is based on sale contract while a conventional bank advances loan and charges interest. The relationship between Islamic bank and the customer is one of seller and purchaser while in conventional banking it is one of creditor and borrower.
2.

In Murabahah the price of the sold asset is fixed while the amount paid by the borrower to the conventional bank may depend on the rate of interest which fluctuates.

3.

In conventional banking in case of default payment, the borrower will be charged interest on interest as the arrears would be capitalised. However, in Islamic banking the bank may sue the purchaser for default but cannot increase the price.

4.

In conventional banking if the borrower is unable to pay the instalments the property will be possessed by the bank. In Islamic banking if the customer is unable to pay the price, the bank will take a legal action, possess the property and sell it to another purchaser. The Islamic bank is entitled to receive the outstanding amount and should return the balance to the customer.

5.

In conventional banking if the borrower wants to pay before the due date of instalments, he may get a rebate. On the other hand, a purchaser who wants

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to pay all the outstanding balance in lump sum may get ibra from the Islamic bank. 6. The purchaser from an Islamic bank should be entitled to the various options that enable him to cancel the contract. This issue does not arise in a conventional banking as the contract between the parties is a loan contract. Reasons behind Murabahahs Popularity
1-

Murabahah is necessitated by the fact that people want to buy properties such as

house or vehicle. Profit/loss sharing contracts are not suitable for sale and purchase agreements.
2-

It is a sale contract where the ownership with all its obligations, for instance,

insurance, maintenance, and taxes, is transferred to the purchaser.

It generates an unconditional debt in a fixed amount, unlike a partners right to

share in future profit.

As a debt obligation, it can be secured. Compare to partnership, reduces the need to monitor the customers business or

trust his honesty.

Tawliyah or Non-profit sale Tawliyah means appointment as a Wali or delegation as the seller is delegating ownership to the buyer. It refers to non profit sale or resale at cost price without any addition. The seller sells the goods to the buyer for the price, which he had originally paid without any profit or loss. It is a sale of trustworthiness and reliability where the purchaser

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has entrusted the seller to fix the original price without any evidence. If there is any deception in case of Tawliyah, the purchaser may deduct the amount from the price.

Al-Wadiah It is a resale of a thing for an exact similar to the first price with some abatement or decrease. Thus, wadiah refers to a sale with some loss to the seller.

Sale for Deferred Payment Bay Bi-thaman Al-Ajil (BBA) B.B.A is a defined as an instalment sale. It is a contract whereby the commodity is delivered immediately and the price is paid by instalments. The payment is delayed to a fixed and stipulated period of time. The selling price includes the cost price plus an agreed profit margin which will increase depending on the length of period over which the deferment is agreed upon. Nevertheless the selling price is known from the time the contract is made. According to some writers BBA occurs when the payment of Murabahah is deferred to a certain date agreed upon by the parties. It is also possible to say that while in Murabahah the original cost is disclosed it may not be necessary under BBA. In the Malaysian context the selling price both in Murabahah and BBA is based on the cost price. However, Murabahah is used for short-term transactions while BBA is used for longer term transactions.

Can the seller increase the price if the buyer asks for deferred payment or instalments? There are two views. The oponents argue that the price increase is due to the time delay that resembles interest as interest is also a price for time. They contend that the

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transaction, therefore, amounts to riba. The proponents argue that the basic principle in transactions is permissibility (ibahah). Since, there is no clear prohibition on this transaction they contend that it is allowed. They further argue that the seller is free to increase the price as long as it does not amount to exploitation or clear injustice.

Transaction of BBA.

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