Now that the Murabahah structure has been covered in the last few articles from all angles, readers must have realized that this is the best transparent option gifted by Islamic finance to push for global trade.
The flexibility of the Murabahah structure allows it to be used by different facets of the commercial landscape for readily available commodities, goods and assets. Let us first find out how it is used in the Islamic banking industry.
An Islamic bank can use the Murabahah structure to finance its customers from retail as well as corporate segments, besides those from the wealth management and capital market sectors. On the retail side, the Murabahah structure is commonly used for car financing and white goods financing whereas some private banking customers are also accommodated by the bank in the purchase of land or ready property for a relatively short tenure.
Islamic banks allocate revolving Murabahah lines to their corporate clients in order to fund their ongoing trading needs from local as well as foreign markets. For example, an Islamic bank purchases raw material from a supplier and sells it to the customer for the customer’s manufacturing needs by using the Murabahah structure. A trader’s requirements are also supported by the Islamic bank through the extension of a regular Murabahah facility for the import or local purchase of goods.
On the capital market side, at times, the Murabahah structure is also adopted by the Islamic banks to meet the needs of the customers looking to purchase shares, either through an initial public offering or from the secondary market.
It is interesting to note that although the Murabahah structure can be adopted to issue Sukuk, it will remain a privately placed, non-listed and non-trading instrument in nature. This is because the Murabahah is a debt-based transaction and readers know well that Shariah bars trading in debt. This is also the reason that no Islamic bank allows discounting or factoring facility to customers.
I am sure some readers must be asking when do I broach upon the subject of commodity Murabahah or Tawarruq? I had kept this discussion for last since the genuine applications of Islamic structures are the utmost objective of this series.
As for Tawarruq, some scholars say that it is not a pure-bred Islamic finance product, such as car Murabahah or goods Murabahah. They proclaim Tawarruq as a mere financial accommodation which impersonates an interest-bearing loan. Some scholars go to the extent of censuring Tawarruq for reducing the global appeal of Islamic finance since it takes away the ingenuity and introduces mimicry to Islamic finance.
I personally believe that the best chance Islamic finance ever had in order to capture the global imagination and enter the mainstream financial markets was in the aftermath of the global financial crisis of 2007/8. Had all stakeholders of Islamic finance gotten together and presented a single set of Islamic financing solutions to the international financial markets based on ethics, morals and transparency, the Islamic finance industry today would have been much bigger, brighter and broad-based.
A regulator from the western world quipped at the time in a conference as to which Islamic finance model were he supposed to examine and consider? Should it be the ‘liberal’ Malaysian model or the conservative Gulf model, or somewhere in the middle of both? Honestly, I had no response to his searching question.
The Fatwa says that according to Islamic jurists, Tawarruq means the purchase of goods by a person on a deferred payment basis so as to sell the same on cash at a lower price to a party other than the seller with the purpose to get cash. This type of Tawarruq is acceptable provided that the conditions of sale, as laid down by Shariah, are met. Also, jurists do not want it to be a norm but to be used in exceptional situations.
Organized Tawarruq means the purchase of goods by a person from the seller on a deferred payment basis and the seller facilitating the resale of the same goods on a cash basis for the buyer at a lower price either by itself or through an agent. The jurists do not consider this type of Tawarruq to be Shariah compliant.
Sadly, the heavy adoption of this type of Tawarruq in some jurisdictions has eclipsed the beauty and effectiveness of the core Islamic financing solutions.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Next Week: The Tawarruq debate to continue next week. I invite you to share your views