Murabahah is the fixed price sale and purchase contract permissible under Shariah where the seller discloses the cost of the subject matter of the Murabahah contract along with the profit it is charging to the buyer.
Why is the seller required to reveal the cost of goods it is selling to the buyer in terms of a Murabahah contract? This is to instill a high level of transparency in the trade transactions so as to eliminate ambiguity and prevent the seller from charging an exorbitant profit to the buyer.
It is generally observed that in the normal course of trading activities in the market, a trader who is honest to customers with regard to the cost of acquiring the goods and the profit he is taking from them enjoys high credibility, leading to larger turnover besides being successful in the hereafter. On the contrary, the trader who adopts opaque tactics may attain temporary success in terms of commercial gains but ultimately loses his credibility in the market, in addition to paying a heavy price in the hereafter.
Murabahah is also termed as a trust sale since the buyer believes on the disclosure made by the seller as to the seller’s cost of acquiring the goods, the direct expenses added to the cost (if any) and the profit added to both the aforementioned elements. Islamic jurisprudence (Fiqh) does not lay down a condition for the seller to prove to the buyer as to the extent of cost and profit by way of oath or documentary proof. Thus, the buyer ought to believe the seller in this regard. The scholars quote the following verse from the Holy Quran in this respect: “O you who believe, do not betray the trust of Allah and his Messenger, nor misappropriate knowingly things entrusted to you. (8:27).”
In addition, there is an authentic saying of Prophet Mohammed (peace be upon him) where he said “Whoever cheats us is not one of us”, ie not one of the believers.
Legality of Murabahah
The Shariah authenticity for carrying out Murabahah transactions is based on the permissibility of carrying out a sale and purchase in general terms. God Almighty says in Chapter 2 verse 275 of the Holy Quran: “God has permitted trade and forbidden usury.” In addition, verse 198 of the same chapter states: “It is no crime for you to seek the bounty of your Lord” – here bounty means earning a profit through trading.
Murabahah is the widely used mode of financing with Islamic banks and financial institutions in the modern age. However, it is interesting to note that the term simply refers to a sale transaction with an element of disclosed cost and profit for the benefit of the buyer, and does not necessarily carry the sense of a deferred sale or financing.
Keeping in view the aforesaid explanation, a Murabahah transaction represents selling a commodity or asset based on the seller’s purchase price from a third party (which may include all direct costs in acquiring the same by the seller) with a defined profit margin agreed to by the buyer. This mark-up may be a percentage of the seller’s purchase price or a lump sum amount.
Shariah principles do not allow eliminating the inherent risks from a transaction but contemporary scholars have provided guidance on mitigating the risks to the extent possible. Therefore, if a situation arises where a potential buyer approaches a potential seller asking the latter to sell a certain quantity of goods to the former on a Murabahah basis, the seller may seek a unilateral document called the ‘promise to purchase’ from the potential buyer in which the potential buyer undertakes to buy the goods from the potential seller upon the latter sourcing it from third parties and that in the case of failure on the part of the potential buyer, the potential buyer shall compensate the potential seller for any loss. This type of arrangement provides the desired protection to the potential seller without compromising on any Shariah principle.
A question arises as to why the ‘promise to purchase’ is unilaterally signed only by the potential buyer. It is because, as discussed earlier in this space, Islam does not allow entering into a forward contract whereby both considerations, ie delivery of goods and price are deferred. As per Shariah principles, either the price or the delivery can be deferred but both considerations cannot be deferred at the same time.
As such, if the potential seller also signs the ‘promise to purchase’, the document shall turn from unilateral to a bilateral contract in which the delivery and the price both are being deferred, which is impermissible in Shariah. The readers shall recall that the mass execution of the forward contracts were a major contributory factor in the financial crisis of 2008.
It is not necessary that a Murabahah transaction must be preceded by a ‘promise to purchase’. There may be a Murabahah transaction where no such document was sought by the seller based on the trust developed with the buyer.
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 a Murabahah contract to continue.