In the name of God, the compassionate the merciful
Murabaha is basically an asset-based financing transaction. It is the most widely used mode of financing of assets by Islamic banks. Murabaha is also the biggest on the asset side of the Islamic bank’s financial statements. Murabaha is a cost-plus profit sale. Further, it is not a normal sale in the market in the sense that it is mandatory for the seller to reveal the cost-plus profit of the item being sold to the buyer, lest Murabaha becomes batil (invalid) sale contract per shariah guidelines. Murabaha is the exact opposite of bai Musawama, where a seller is not mandated to disclose the cost-plus profit of a commodity.
It is also to be noted that Murabaha-based sale contract is among the Islamic finance sale transactions known as buyu’u Al-Amanah (trust-based sales), which include bai Tawliya (sale at a cost without making a profit) and bai Wadiah (sale at a loss).
The legal evidence for the permissibility of trust-based sales in Islam is the verse “it is no crime for you to seek the bounty of your Lord”, Al-Bakarah 2: 198. In addition, a hadeeth of the messenger of Allah narrated that “the prophet (SAW) bought a she-camel from Abubakar to be used as means of transportation to migrate to Madinah. Abubakar had wanted to give it to the prophet free of charge but the prophet refuse and said “I will preferably take it at the acquisition price”, (meaning the prophet (SAW) bought the she-camel at the cost price without profit. This transaction between the prophet (SAW) and Abubakar (RA) is an example of bai Al-Tawliya.
There are two types of Murabaha: the simple classical Murabaha contract which consists of only two parties; a buyer and a seller. The second is the modern Murabaha used by almost all Islamic banks called Murabaha lil-Amir bisherah (Murabaha to the Purchase orderer), which consists of three parties namely, the purchase orderer (Islamic bank’s client), the purchaser (Islamic bank) and the seller (asset dealer).
Paying for a big-ticket item such as cars, machinery and other heavy equipment is difficult. A simple illustration; In essence, what happens is that the person who is in need of equipment without the whole amount of cash at hand approaches the Islamic bank as the bank’s client and makes an order. The Islamic bank then goes to the dealer of such equipment, buys the equipment from the dealer, takes either physical or constructive possession of the equipment and then sells it to the client who ordered the equipment, at a markup (cost plus profit). This also means that the client has already made a promise to buy from the Islamic bank. The client now takes the equipment and owns it from the Islamic bank through the change of ownership. As the client owns the equipment, he then begins to pay based on the agreement he made with the bank. The payment could be in instalments, deferred (bai bi thamin ajal BBA), or lump sum after a certain time. It is also important to note that payment for Murabaha can also be made on
spot bases. However, it is normally very rare in such cases. Note that as the client continues to pay the Islamic bank for the equipment, he is as well gradually owning a share in the equipment. His share will continue to increase until he finally finishes payment and owns the equipment fully.
The bias for the use of Murabaha by Islamic banks against the other Islamic modes of financing is because this contract is less risky than other sale contracts such as Salam and Istisna’a, as these two contracts need time to implement and deliver the sale. The use of Murabaha by Islamic banks also allows the banks to reinvest their surplus liquidity for more returns and to improve upon the Islamic bank’s cashflows.
To the customer, Murabaha is an easy and flexible source of owning a big-ticket asset without a hindrance from the already established cash and carry, interest-based system, which makes it difficult for people who do not have the cash readily available to purchase such assets. Some may have the cash readily available yet have budget constraints. Murabaha comes in to remove such difficulties. Murabaha type of sale satisfies all legal requirements for sale, and it provides a valuable service in the economy since it allows only the experts in the area to obtain the commodities at a good price.
In fact, through Murabaha financing, many families in the Middle East and North Africa (MENA region), Malaysia, Indonesia, Pakistan, etc. have been able to own homes, cars and heavy equipment to enhance their lives. Murabaha has also proved to be an accessible and flexible means of financing a big-ticket asset, and this translates into lower unemployment and stimulates a bee hive economic activity. And Allah knows best!
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
Email: yahaya0246873726@gmail.com
Facebook account: facebook.om/Yahaya.iliasu.94
0506218343 / 0246873726
