After having familiarized ourselves with the notion of a Murabahah or ‘cost plus sale’ Shariah transaction, we shall now have a glance at the parameters of this very widely used form of financing by Islamic banks and Islamic financial institutions.
There are certain do’s and don’ts on entering into a Murabahah contract by an Islamic financial institution. In the modern world, these have been approved by a wide range of Shariah scholars and standard-setting bodies such as AAOIFI, the IFSB and the International Islamic Financial Market and they might as well be considered as the unwritten global law on how a Murabahah transaction ought to be carried out.
The good news is that although the said standards are optional in nature, on a daily basis, millions of Murabahah transactions are carried out almost entirely on the following discipline as follows:
• A customer of an Islamic financial institution (or the Islamic financial institution’s buyer) is permitted to ask the Islamic bank to purchase the goods from a particular supplier (whom he/she trusts) for an onward sale to the customer on a Murabahah basis. Nevertheless, the Islamic bank shall have the right to decline such a request and buy the goods from its own preferred source of supply, provided the specification and quality sought by the buyer under the Murabahah contract is not compromised.
• With reference to the earlier discussion on obtaining a ‘promise to purchase’ from the customer before the Islamic financial institution purchases the required goods from the third-party supplier in order to protect the bank’s interest, this document can be amended by the customer pursuant to submission vis-a-vis the quality, price, deferment period and such, save as this is with the Islamic financial institution’s consent besides the fact that it is done prior to entering into Murabahah contract by the Islamic financial institution and the customer.
• It may be possible that the customer and supplier have already entered into a trading contract directly prior to the customer approaching the Islamic financial institution. If that has been the case, the Islamic financial institution will not be in a position to provide any Murabahah financing to the customer since the title to the goods has already passed to the customer from the supplier, and now purchasing the goods from the customer at a certain price on the spot basis and selling it back to the customer at a higher price on a deferred basis shall constitute Bai Al Inah which is not approved by a majority of scholars since it mimics an interest-based lending transaction.
• It is also necessary that the supplier must be a third party in the genuine sense of the word and should not be the subsidiary or agent of the customer. This is to avoid Bai Al Inah situation.
• The subject matter of the Murabahah transaction must not be gold, silver or currency since Shariah principles do not allow making money out of money. Attention can be drawn to the fact covered in earlier articles that gold and silver are termed as money in Islam and hence the Shariah principle of exchange (Sarf) shall apply here which calls for gold, silver and money to be traded on the spot basis only.
• Murabahah receivables cannot be discounted or factored or securitized since Islam prohibits the trading of debt. As such, a Sukuk Murabahah facility can be issued but it cannot be freely traded at a bourse or over the counter since the outcome of a Murabahah transaction shall always be debt.
• In case of non-payment of the Murabahah amount by the customer on due date, it cannot be ‘rolled over’ or ‘refinanced’ with additional profit as is freely done in the conventional banking landscape. Remember, this is the fixed price sale contract where, once entered, none of its terms can be altered, especially in relation to the Murabahah amount. If any extension in period for Murabahah payment is granted by the Islamic financial institution, it must be without increasing the original Murabahah amount.
• As per the unanimously agreed Shariah position, an Islamic financial institution may seek from the customer some sort of guarantee or collateral against the outstanding Murabahah amount in order to protect the interest of its shareholders and depositors. It is to be noted that the outstanding Murabahah amount is termed as credit risk wherein it is permissible to secure such risk through any permissible means agreed to by the Islamic financial institution with the customer.
• Shariah fairness requires that if the customer insists that the Islamic financial institution procures goods from a particular source, the Islamic financial institution shall not be responsible to bear the consequences if the goods turn out to be inferior. In this case, the customer shall be held responsible and the Islamic financial institution must be indemnified by the customer.
• The Islamic financial institution may seek a security margin from the customer. This is to be paid by the customer at the request of the Islamic financial institution based on the Islamic financial institution’s assessment of customer’s financial position.
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 Week: Explanation of the parameters of the Murabahah contract to continue.