A few explanations regarding last week’s article. Of course under the Murabahah sale and purchase transaction, the seller must disclose the cost at which it bought the goods (ie the price paid to the third-party seller and any direct expenses incurred by the seller) plus the profit it is making from the transaction.
The question which aroused the interest of a reader is related to whether it is a must for any seller in Shariah compliant transactions to provide the breakdown of the selling price to the buyer without which no deal can take place? Also, why should a buyer under Murabahah fully rely on the cost and profit figures provided by the seller which could be incorrect or deceptive?
With regard to the first question, it is important to note that in Shariah, Murabahah is not the only contract available to a seller transacting with a buyer. The alternate structure for sale of readily available goods — in the case the seller does not want to reveal the cost of goods and its profit — is called ‘Musawamah’. Here too, all the terms and conditions as required in Murabahah shall apply, for example the clean ownership and possession of goods with the seller at the time of concluding the sale, and that the goods must be Shariah compliant apart from immediate transfer of ownership and possession to buyer irrespective of the payment terms which could be spot or deferred.
I would like to clarify the misperception some quarters have about Murabahah being akin to the ‘rent-to-own’ model in the conventional financial world where the purchaser does not become the true owner until the loan is fully paid. This is not the case with Murabahah since Shariah principles demand that the ownership of the subject matter of the Murabahah transaction is immediately shifted to the buyer and that the deferred payment terms agreed between the seller and buyer must not impact the transferability of the ownership.
Nevertheless, as always the case, Shariah parameters provide an alternate option to protect a seller’s interest in a deferred Murabahah transaction, that is to mortgage or pledge or lien the Murabahah asset in favor of the seller till such time that the full Murabahah amount is settled by the buyer. In this case, although the buyer shall become the title holder of the Murabahah asset, it shall not be able to further dispose of the same till full repayment of the Murabahah amount.
Coming back to Musawamah, either the buyer shall accept whatever price the seller is quoting, or both parties enter into negotiation and meet halfway to conclude the deal. It is possible that the negotiation would not lead to anywhere and the session could be dismissed without any sale and purchase taking place.
There are several examples of Musawamah in our daily life, such as, shopping for household items, grocery, clothes, furniture, electronics etc where the retailer never conveys its cost of merchandise and profit. Families simply try to bargain and if they are lucky, the price is brought down by the seller in order to dispose of the goods. If the seller refuses to budge, the retail buyer has two options: either succumb to the seller’s firm stance or move on to check other retailers selling the same merchandise. This is perfectly alright in Shariah if the goods are Shariah compliant and are in the seller’s ownership and possession and that these are transferred immediately to the buyer upon conclusion of the deal.
As to the other question about the seller providing misleading cost and profit figures to the buyer under a Murabahah-based transaction, although it is an Islamic transaction and the seller ought to be honest and pass on the correct figures, there is a possibility that the figures have been doctored so as to hide the actual profit being amassed from the transaction.
As the wise late Sir Noël Coward said on the world fast losing moral and ethics: “It’s discouraging to think how many people are shocked by honesty and how few by deceit.” Therefore, in this day and age, the buyer under a Murabahah transaction has the right to be satisfied with the seller’s claim on the cost and profit. It should not be difficult for the buyer to verify the cost price from the market and with a little bit of calculation, conclude whether the seller has been truthful, or otherwise. Also, it is possible for the buyer to directly seek from the seller the evidence in support of its claim for quoting the cost at a certain amount.
The most transparent Murabahah transactions are found in Islamic banks where the cost and mark up are abundantly clear. Islamic banks have used the Murabahah structure fairly effectively as a means of deferred financing, albeit for a shorter term period owing to its nature being a fixed price (amount) contract, and that a longer term Murabahah transaction may expose the bank to the market rate.
Do Islamic banks need to worry about market rates? Come back and find out in IFN Volume 16 Issue 1 dated the 9th January 2019.
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.
Sohail Zubairi is the projects advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected]
Next Issue: Explanation of Murabahah contract to continue.