Religious justification
While orthodox Islamic scholars have expressed a lack of enthusiasm for ''murabaha'' transactions, calling them "no more than a second best solution" ( Council of Islamic Ideology) or a "borderline transaction" (Islamic scholar Taqi Usmani), Usmani, ''Historic Judgment on Interest'', 1999: para 227 nonetheless they are defended as Islamically permitted. According to Taqi Usmani, the reference to permitted "trade" or "trafficking" inthe objection of the infidels ... was that when they increase the price at the initial stage of sale, it has not been held as prohibited but when the purchaser fails to pay on the due date, and they claim an additional amount for giving him more time, it is termed as "riba" and haram. The Holy Qur'an answered this objection by saying: "Allah has allowed sale and forbidden riba." Usmani, ''Historic Judgment on Interest'', 1999: para 219Usmani states that while it may appear to some people that allowing a buyer more time to pay for some product/commodity (deferred payment) in exchange for their paying a higher price is effectively the same as paying interest on a loan, Usmani, ''Historic Judgment on Interest'', 1999: para 223 this is incorrect. In fact, just as a buyer may pay more for a product/commodity when the seller has a cleaner shop or more courteous staff, so too the buyer may pay more when given more time to complete payment for that product or commodity. When this happens, the extra they pay is not ''riba'' but just "an ancillary factor to determining the price". In such a case, according to Usmani, the "price is against a commodity and not against money" — and so permitted in Islam. When a credit transaction is made ''without'' the purchase of a specific commodity or product, (i.e. a loan is made charging interest), the added charge for deferred payment is for "nothing but time", and so is forbidden ''riba''. Usmani, ''Historic Judgment on Interest'', 1999: para 225 However according to another Islamic finance promoter—Faleel Jamaldeen -- "murabaha payments represent debt" and because of that are not "negotiable or tradable" as Islamic finance instruments, making them (according to Jamaldeen) unpopular among investors. Jamaldeen, ''Islamic Finance For Dummies'', 2012:220
Islamic finance, use, variations
;Limits of use in fiqh In its 1980 ''Report on the Elimination of Interest from the Economy'', the Council of Islamic Ideology of Pakistan stated that ''murabahah'' should *be undertaken only when the borrower wants to borrow to purchase a some item *must involve **the item being purchased by the bank; **coming under the ownership and possession of the bank; **which must assume the risk for that item; *the item then being sold to the customer through a valid sale; Usmani, ''Historic Judgment on Interest'', 1999: para 190 *be used to the "minimum extent" and *only in cases where profit and loss sharing is not practicable. ''Murâbaḥah'' is one of three types of ''bayu-al-amanah'' (fiduciary sale), requiring an "honest declaration of cost". (The other two types are ''tawliyah''—sale at cost—and ''wadiah''—sale at specified loss.) According to Taqi Usmani "in exceptional cases" an Islamic bank or financial institution may lend cash to the customer for a murâbaḥah, but this is when the customer is acting as an ''agent'' of the bank in buying the good the customer needs financed.ere direct purchase from the supplier is not practicable for some reason, it is also allowed that he makes the customer himself his agent to buy the commodity on his behalf. In this case the client first purchases the commodity on behalf of his financier and takes its possession as such. Thereafter, he purchases the commodity from the financier for a deferred price. Usmani, ''Introduction to Islamic Finance'', 1998: p.73The idea that the seller may not use murâbaḥah if profit-sharing modes of financing such as mudarabah or musharakah are practicable, is supported by other scholars that those in the Council of Islamic Ideology. ;Limits of use in practice But these involve risks of loss, profit-sharing modes of financing cannot guarantee banks income. ''Murabahah'', with its fixed margin, offers the seller (i.e. the bank/financier) a more predictable income stream. One estimate is that 80% of Islamic lending is by ''murabahah''. M. Kabir Hassan reports that ''murabaha'' accounts are quite profitable. As of 2005, "the average cost efficiency" for ''murabaha'' was "74%, whereas average profit efficiency" even higher at 84%. Hassan states, "although Islamic banks are less efficient in containing cost, they are generally efficient in generating profit." Islamic banker and author Harris Irfan writes that use of ''murabaha'' "has become so distorted from its original intent that it has become the single most common method of funding inter-bank liquidity and corporate loans in the Islamic finance industry." A number of economists have noted the dominance of ''murabahah'' in Islamic finance, despite its theological inferiority to profit and loss sharing.Iqbal, Munawar, and Philip Molyneux. 2005. ''Thirty years of Islamic banking: History, performance and prospects.'' New York: Palgrave Macmillan.Kuran, Timur. 2004. ''Islam and Mammon: The economic predicaments of Islamism''. Princeton, NJ; Princeton University PressLewis, M.K. and L.M. al-Gaud 2001. ''Islamic banking''. Cheltenham, UK and Northampton, MA, USA: Edward Elgar One scholar has coined the term "the ''murabaha'' syndrome" to describe this.Yousef, T.M. 2004. The murabaha syndrome in Islamic finance: Laws, institutions and policies. In ''Politics of Islamic finance,'' ed. C.M. Henry and Rodney Wilson. Edinburgh: Edinburgh University Press The accounting treatment of murâbaḥah, and its disclosure and presentation in financial statements, vary from bank to bank. If the exact cost of the item(s) cannot be or are not ascertained, they are sold on the basis of ''musawamah'' (bargaining). Different banks use this instrument in varying ratios. Typically, banks use ''murabaha'' in asset financing, property,
Variations
In addition to being used by Islamic banks, ''murabahah'' contracts have been used by Islamic investment funds (such as SHUAA Capital of Saudi Arabia and Al Bilad Investment Company), and sukuk (also called Islamic bonds)(an example being a 2005 sukuk issued by Arcapita Bank sukuk in 2005).''Bay' bithaman 'ajil''
(Also called ''Bai' muajjal'' abbreviated BBA, and known as credit sale or deferred payment sale). Reportedly the most popular mode of Islamic financing is cost-plus ''murabaha'' in a credit sale setting (''Bay bithaman 'ajil'') with "an added binding promise on the customer to purchase the property, thus replicating secured lending in `Shari'a compliant` manner." The concept was developed by Sami Humud, and shortly after it became popular Islamic Banking began its strong growth in the late 1970s. El-Gamal, ''Islamic Finance'', 2006: p.18 Another source (Skrine law firm) distinguishes between ''Murabahah'' and ''Bay' bithaman 'ajil'' (BBA) banking products, saying that in BBA disclosure of the cost price of the item being financed is not a condition of the contract. One variation on ''murabahah'' (known as "Murabahah to the Purchase Orderer" according to Muhammad Tayyab Raza) allows the customer to serve as the "agent" of the bank, so that the customer buys the product using the bank's borrowed funds. The customer then repays the bank similar to a cash loan. While this is not "preferable" from a Sharia point of view, it avoids extra cost and the problem of a financial institution lacking the expertise to identify the exact or best product or the ability to negotiate a good price.''Bay' al-Ina''
(Also ''Bay' al-'Inah''). This simple form of ''murabahah'' involves the Islamic bank buying some object from the customer (such as their house or motor vehicle) for cash, then selling the object back to the customer at a higher price, with payment to be deferred over time. The customer now has cash and will be paying the bank back a larger sum of money over time. This resemblance to a conventional loan has led to ''bay' al-ina'' being criticized as a ruse for a cash loan repaid with interest. It was used by a number of modern Islamic financial institutions despite condemnation by jurists, but in recent years its use is "very much limited" according to Harris Irfan.''Bay' al-Tawarruq''
Legal status
United States
In the United States theInterpretive Letter #867. November 1999 ... In the current financial marketplace lending takes many forms . ... murabaha financing proposals are functionally equivalent to or a logical outgrowth of secured real estate lending and inventory and equipment financing, activities that are part of the business of banking. El-Gamal, ''Islamic Finance'', 2006: p.15
Challenges and criticism
Orthodox Islamic Scholars such as Taqi Usmani emphasize that murâbaḥah should only be used as a structure of last resort where profit and loss sharing instruments are unavailable. Usmani himself describes ''murâbaḥah'' as a "borderline transaction" with "very fine lines of distinction" compared to an interest bearing loan, as "susceptible to misuse", and "not an ideal way of financing". He laments thatMany institutions financing by way of ''murabahah'' determine their profit or mark-up on the basis of the current interest rate, mostly usingAnother pioneer, Mohammad Najatuallah Siddiqui, has lamented that "as a result of diverting most of its funds towards murabaha, Islamic financial institutions may be failing in their expected role of mobilizing resources for development of the countries and communities they are serving," and even bringing about "a crisis of identity of the Islamic financial movement." Some Muslims (Rakaan Kayali among others) complain that ''murabaha'' does not eliminate interest as it guarantees for itself the amount of profit it collects, and so amounts to a '' Ḥiyal'' or legal "trick" to defeat the intent of shariah. Khalid Zaheer considers it an example of how two classical shariah-compliant contracts (''Murabahah'' and ''Bai Muajjal'') can be combined to form a contract that is not compliant. Non-orthodox critics of ''murâbaḥah'', have found the distinction of setting a price "against a commodity" as opposed to "against money" — with the first being allow and the second forbidden because "money has no intrinsic utility" — abstract or suspicious. Usmani, ''Historic Judgment on Interest'', 1999: para 224-5 According to El-Gamal it has been called "merely inefficient lending". However criticism of the transaction has been primarily levied against its application. Critics complain that in most real world ''murâbaḥah'' transactions the commodities never change hands (the commodity never appears on the bank's balance sheet) and sometimes there are no commodities at all, merely cash-flows between banks, brokers and borrowers. Often the commodity is completely irrelevant to the borrower's business and not even enough of the relevant commodities are in existence in the world to account for all the transactions taking place. Frank Vogel and Samuel Hayes also note multi-billion-dollar ''murabaha'' transactions in London "popular for many years", where "many doubt the banks truly assume possession, even constructively, of inventory". Islamic banker Irfan bemoans the fact that "not only is the ''murabaha'' money market insufficiently well developed and illiquid, but the very sharia compliance of it has come to be questioned", often by Islamic scholars not known for their strictness. Nejatullah Siddiqi warned the Islamic banking community that the alleged difference between modes of finance based on ''murabahah'', ''bay' salam'' and conventional loans was even less than it appeared:LIBOR The London Inter-Bank Offered Rate (Libor ) was an interest rate average calculated from estimates submitted by the leading Bank, banks in London. Each bank estimated what it would be charged were it to borrow from other banks. It was the prim ...(Inter-bank offered rate in London) as the criterion.
Some of these modes of finance are said to contain some elements of risk, but all these risks are insurable and are actually insured against. The uncertainty or risk to which the business being so financed is exposed is fully passed over to the other party. A financial system built solely around these modes of financing can hardly claim superiority over an interest-based system on grounds of equity, efficiency, stability and growth.Mohammad Nejatullah SIDDIQI. Issues in Islamic BankingCirca 1999 the Pakistan eicester: The Islamic Foundation, UK, 1983, p.52 Circa 1999 the Pakistan Federal Shariat Court ruled that the "mark-up system ... in vogue" among banks in Pakistan was against the Islamic injunctions. Usmani noted (much like the complaints above) that the Pakistani banks failed to follow proper ''murabaha'' requirements—not actually buying a commodity or buying one "already owned by the customer". Usmani, ''Historic Judgment on Interest'', 1999: para 191 ;Late payment While in conventional finance late payments/delinquent loans are discouraged by accumulating interest, in Islamic finance control and management of late accounts has become a "vexing problems", according to Muhammad Akran Khan.#WIWWIE2013">Khan, ''What Is Wrong with Islamic Economics?'', 2013: p.207-8 Others agree it is a problem. According to Ibrahim Warde,
Islamic banks face a serious problem with late payments, not to speak of outright defaults, since some people take advantage of every dilatory legal and religious device ... In most Islamic countries, various forms of penalties and late fees have been established, only to be outlawed or considered unenforceable. Late fees in particular have been assimilated to riba. As a result, 'debtors know that they can pay Islamic banks last since doing so involves no cost' Warde, ''Islamic finance in the global economy'', 2000: p.163Warde also complains that
"Many businessmen who had borrowed large amounts of money over long periods of time seized the opportunity of Islamicization to do away with accumulated interest of their debt, by repaying only the principal -- usually a puny sum when years of double-digit inflation were taken into consideration.Some suggestions to solve the problem include having the government or the central bank penalizing defaultors "by depriving them" of the use of "any financial institution" until they paid up (Taqi Usmani in ''Introduction to Islamic Finance'') -- although this would require a completely Islamized society. Collecting late fees but donating them to charity, Collecting late fees only when the buyer "has deliberately refused to make a payment". ;Extra costs Because ''murabaha'' financing is “asset-based” financing (and must be to avoid riba according to orthodox Islamic thinking), it requires financiers to purchase and sell properties. But regulatory frameworks in most countries forbid financial intermediaries such as banks "from owning or trading real properties" (according to scholar Mahmud El-Gamal). Furthermore when the financier holds title to the property being sold it can be lost "if the financier is sued, loses, and declares bankruptcy", and this can happen when a customer has paid off most /almost all of the product/property’s price. To avoid these dangers SPVs ( Special Purpose Vehicles) are created to hold title to the property and also "serve as parties to various agreements regarding obligations for repairs and insurance" as required by Islamic jurists. However, the SPVs entail extra costs usually not borne in conventional finance. El-Gamal, ''Islamic Finance'', 2006: p.14, 64-5 ;Example of Murâbaḥah An example of a ''murabaha'' contract is: Adam approaches a ''Murabaha'' Bank in order to finance the purchase of a $10,000 automobile from “Cash-Only-Automobiles”. The bank agrees to purchase the automobile from “Cash-Only-Automobiles” for $10,000 and then sell it to Adam for $12,000 which is to be paid by Adam in equal installments over the next two years. While the cost to Adam is approximately that of a 10% per year loan, the ''Murabaha'' Bank using this transaction maintain it is different because the amount that Adam owes is fixed and does not increase if he is delinquent on payments. Therefore, the finance is a sale for profit and not ''riba''. Another argument that ''murahaba'' is shariah compliant is that it is made up of two transactions, both
See also
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Notes
Citations
Books, documents
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