I will pause the discussion on the current subject of Mudarabah to share with you a landmark Dubai Cassation Court decision that came out last week declaring the so-called commodity Murabahah transactions akin to usurious practice.
This takes me back to February 2019 when I wrote articles 45 to 49 on the same subject and concluded that the commodity Murabahah transactions cannot be from the Islamic finance genre as these are mere mimicry of conventional interest-bearing loans. Let us have a look at the court’s verdict which, in a sense, vindicates what I had explained more than a year ago.
In a nutshell, the court’s decision has resolved that Islamic financial institutions ought to follow a proper and real-world mechanism if they want to enter into a Murabahah transaction in a Shariah compliant manner, rather than simply naming the transaction as such.
The court further professed that the process for entering into a Murabahah contract is subject to review by the court and, if this is found to be Shariah repugnant, (in part or in whole), the court can declare the transaction as null and void. I believe here the court is referring to any new case of Murabahah which may be brought to the attention of the court where the Islamic financial institution has not gone the whole nine yards in implementing Shariah parameters.
The decision further explained that for a Murabahah contract to be valid, the financial institution, ie the seller of the concerned goods, should first acquire the ownership of the goods before it sells them to the customer.
Interestingly, the defendant, ie the customer of the Islamic financial institution, submitted the argument to the court that the Murabahah contract it was asked to sign by the institution seemed more like a conventional interest-bearing loan agreement since the goods mentioned in the Murabahah contract were never delivered to the customer by the institution and that the customer only received the funds with an obligation to return them to the bank together with the profit (which the customer considered as interest) in due course.
Explaining the Murabahah transaction as the defendant (customer) understood, it submitted that a Murabahah transaction by nature is a sale contract where the Islamic financial institution buys the goods, owns them first and then resells them to the customer on a cost plus profit basis. The customer added that if the role of the Islamic financial institution is merely to finance the deal without the proper purchase of goods and their onward sale to the customer, such a transaction is not in compliance with the Shariah principles on Murabahah but merely a usurious transaction which has no place in Islamic finance.
After listening to the customer’s argument, the court concluded that the defendant’s plea holds water, requiring the court to have a deeper look into the manner this particular Murabahah transaction had been unfolded at the Islamic financial institution’s end. I believe the relevant Islamic financial institution was unable to convince the judges that it had ticked all the Shariah boxes, hence the decision against it.
In relevance to the aforesaid cassation court finding on how the commodity Murabahah process was completed, leading to the judgment against the Islamic financial institution, I would like to draw readers’ attention to what I had written over a year ago.
If you go through article number 47, you will find a parallel in the shape of an interesting conversation which normally takes place between a bank manager and the customer who needs funds and shall be using the commodity Murabahah (Tawarruq) for the first time.
In the same article, I also gave the example of the customer who had earlier entered into a Murabahah transaction with the Islamic bank for the purchase of a car, which he actually needed, and found the process fairly easy and understandable. When the same customer returns for some funding needs, he could not fathom the process of getting cash by selling palladium (metal) which he was never interested in (unlike the car), never saw it, never got hold off and never ‘sold’ it in the ‘market’.
It is important to note that by default, the Shariah principles have always been pro-business and the loss circumstances cannot be a norm but a rarity if a trader truly follows them along with the necessary day-to-day business acumen.
However, analyzing commodity Murabahah transactions (Tawarruq) from the said Shariah angle, it is clear that customarily, all of them are geared to be loss-incurring since the buyer perpetually sells the goods at a loss (ie at lower than its ‘purchased price’) and registers a deficit outcome which is contrary to the nature of Shariah-based commercial activities.
Therefore, the decision by the Dubai Court of Cassation is commendable since it has undoubtedly established that the (commodity) Murabahah contract (which is obviously based on Tawarruq) entered into by the concerned Islamic financial institution clearly falls short of fulfilling the Shariah criteria for such a transaction.
In my opinion, the landmark decision should pave the way for Islamic financial institutions to explore the true Islamic financing solutions to extend financial support to their customers.
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 senior advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next week: We shall return to the subject of Mudarabah contracts to complete our discussion on a last few points.