Murabaha: cost-plus sales

“Murabaha: cost-plus sales (Jackson 2004, P 26), similar to a buyer’s credit” (UNCTAD 2006, p 12). This is a contract between the customer and the financial institution that entitles the institution to purchase the goods and sell them again to the customer on deferred installments without having an interest-bearing loan (Hassan 2005, p 4-5). Here, it could be said that when the banks undertake the transactions according to Murabaha contracts, they play the role of traders (Akhtar 2005, p 26). The process of this contract starts when the customer requests a tangible asset from a supplier, the financial institution sells it, and then the customer pays the money to the institution on a deferred sale basis with a mark- up reflecting the institution’s profit, which is called a cost-profit (Segrado 2005, p 10). It means that this contract is a sale transaction. A specified profit margin goes to the institution by a special agreement whereby the institution funds the purchasing operation for the benefit of the customer, but indirectly, through buying the goods then selling them again to the customer, who should return the money within an agreed time limit, in installments or in a lump sum. Any risk connected to the institution’s goods should remain its responsibility until they are delivered to the customer. This financing method used to be one of the most important models used extensively by Islamic banks for commodity trade to acquire long-term assets (Obaidullah 2002, p 12). In other words, the financial institution (bank) gives the client a commodity loan, the value of which will be returned to the bank at a cost to the bank plus a mark up (Gaber 2007, p 6). There are some conditions for a correct Murabaha contract:

A- The bank (the seller) keeps the commodity’s ownership rights from the time of negotiation until the end of the contract.

B- The bank should give the client the exact cost of the commodity and define the sum of profit in advance. That must be added together and quoted to the client as a final price (Abdelhamid 2005, p 37).

C- The contract with all its transactions must be free from usury (Riba).

D- Any defect in the goods to be sold must be disclosed by the bank (the seller) (Gaber 2007, p 6).

Murabaha is one of the best known forms of Islamic finance; it is also applicable to financing commercial transactions that require short-term liquid instruments. It can also be used for long-term investments (Lovells 2004, online). “It is estimated that 70 to 80 percent of total Islamic financing is afforded by this arrangement” (Tariq 2004, p 17). In Murabaha contract, the client is certain about all the details of the contract. The client knows the original cost, the mark-up to be paid to the bank. In addition to the clarity of the deferred installments, without any future changes. This means the client is not concerned about many other details, especially in connection with a fluctuating rate of interest influenced by very changeable market prices. The client can pay all the money back at any point without any restriction or redemption fee being charged. He can pay higher installments than the installments agreed on, but of course, not lower. This point is a significant difference between the Islamic and conventional mortgage. Since Qur’an does not say anything about the terms and conditions of the contract except for good faith, the contract fulfillment, and the undertakings, the parties can make any conditions to ensure a safe and secure way of fulfilling the contract. Of course, as mentioned above, the contract conditions should not contradict the Quranic rules, such as the matter of payment of interest, which could arise during the contract’s period.

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