Murabaha & Musawamah
Murabaha & Musawamah
LECTURE
By
Dr. Syed Zulfiqar Ali Shah
Murabaha & Musawamah
Summary of Last Lecture
•Money Monetary Policy & Islamic Finance
•Currency Rate Fluctuation & Settlement of
Debts
•Summary
The Philosophy and Features of Islamic
Finance
Plan of Today’s Lecture
•Introduction
•Conditions of Valid Bai
•Murabaha- A Bai Al Amanah
•Bai Murabaha in Classical Literature
•The Need for Murabaha
•Specific Conditions of Murabaha
•Possible Structures of Murabaha
•Murabaha To Purchase Orderer (MPO)
Murabaha & Musawamah
INTRODUCTION
Murabaha & Musawamah
Introduction
Trading is one of the most common activities of Islamic banks. While
conventional banks simply finance trading businesses by providing funds,
Islamic banks have to be involved in the sale and purchase process for
goods according to the trading rules prescribed by the Shar¯ı´ah. They
are entitled to profit by undertaking business risk like real sector
businesses.
However, Islamic banks’ trading pattern is different from the general
trading business. Banks’ clients normally need a credit facility and the
banks are selling goods on credit and thus creating receivables. Credit
sale (Bai‘ Mu´ajjal) may take a number of forms, important among which
are:
1. Musawamah, or normal sale, in which parties bargain on price, a sale
is executed and goods delivered while payment is deferred.
Murabaha & Musawamah
Introduction
(Cont’d)
2. Murabaha, a “cost-plus sale”, in which parties bargain on the margin
of profit over the known cost price. The seller has to reveal the costincurred by him for acquisition of the goods and provide all costrelated information to the buyer.
Experts in Islamic economics and finance generally advise the use of
profit/loss sharing modes and discourage extensive use of Murabaha or
other trading modes. But, as its permissibility is beyond doubt and all
Islamic banks operating in the world are using this technique excessively
as an alternative to the conventional modes of credit, studying
Murabaha from the point of view of Islamic banking is crucial, and hence
is the subject of the present chapter.
The technique of Murabaha that is currently being used in Islamic
banking is something different from the classical Murabaha used in
normal trade. This transaction is concluded with a prior promise to buy
or a request made by a person interested in acquiring goods on credit.
Murabaha & Musawamah
Introduction
(Cont’d)
As such, it is called “Murabaha to Purchase Orderer” (MPO). The
AAOIFI’s Shar¯ı´ah Standard on Murabaha is also based on this
arrangement. We shall discuss the general rules of Murabaha and
various structures that financial institutions can adopt for sale to help
their clients. Various aspects to be discussed in this regard include the
nature of Murabaha as we find in classical literature on Islamic
jurisprudence, the sorts of goods eligible for selling through Murabaha
on credit, disclosure to the buyer by the seller, combining other
contracts or subcontracts for Murabaha arrangements by Islamic banks,
the concept of Khiyar (option to rescind the sale) and possible defects in
the object of sale, prepayment or late payment by the client, the
possibility of liquidated damages/solatium to banks and the modern
application of Murabaha along with issues involved. Fixity of price, taking
ownership, risk related to ownership and possession of the object of
contract by the bank before sale to the client, timings of Murabaha
Murabaha & Musawamah
Introduction
(Cont’d)
and the principles regarding Murabaha receivables need more focus for
their impact on Shar¯ı´ah compliance.
Murabaha & Musawamah
CONDITIONS OF VALID BAI
Murabaha & Musawamah
Conditions of Valid Bai
Keeping in mind the importance given by Islamic banks to Murabaha,
below is a recap on the salient features and conditions for a valid sale:
1. The people uttering offer and acceptance in respect of a valid sale
should be qualified to enter into the contracts.
2. The sale should take place with free and mutual consent of the seller
and the purchaser.
3. Offer and acceptance must include certainty of price, certainty of
date and place of delivery and certainty about the time of payment
of the price.
4. The seller should be either the owner of the object of sale (Mabi‘) or
an agent of the owner.
5. The Mabi‘ should be alienable. Transfer of title requires acquisition
Murabaha & Musawamah
Conditions of Valid Bai
(Cont’d)
of title by the purchaser, which implies assuming the risks related to
ownership, including the risk of damage, destruction, pilferage or
theft, the risk of obsolescence and the price or market risk.
6. The subject of sale must exist at the time of sale; as such, one
cannot sell the unborn calf of one’s cow, or a bank cannot execute
Murabaha on goods that have already been consumed or used.
7. The Mabi‘ should be well-defined and in the ownership of the seller.
Hence, what is not owned by the seller cannot be sold; for example,
A sells to B a car which he intends to purchase from C (still owned by
C) Since the car is not owned by A at the time of sale, the sale is
void.
8. The subject of sale must be in the physical or constructive
possession of the seller at the time of sale. Constructive possession
means that the buyer has not taken physical delivery of the goods,
but the ownership risk of the goods has been transferred to him.
Murabaha & Musawamah
Conditions of Valid Bai
(Cont’d)
9. Sale must be instant and absolute – a sale attributed to a future date
or a sale contingent on a future event is void. For example, A says to
B on 1st of January: “I sell my car to you on the 1st of February”. The
sale is void, because it is contingent on a future event. He can give
an understanding or a promise, but the sale will have to be executed
on 1st February, and it is only then that rights and liabilities will
emerge.
10. The subject of sale should be lawful and an object of value. A thing
having no value according to the usage of trade cannot be sold;
similarly, the subject of sale should not be a thing used for any
prohibited purpose, e.g. pork, wine, etc.
11. The subject of sale should be specifically known and identified to the
buyer, i.e. it must be identified by pointing out or by detailed
specifications so as to distinguish it from other units of goods not
sold. For example A says to B: “I sell 100 cotton bales out of the
Murabaha & Musawamah
Conditions of Valid Bai
(Cont’d)
bales lying in that building”, if A does not identify the bales, the sale
is void, because in the case of loss to the cotton, it would be difficult
to ascertain who suffered how much loss.
12. The delivery of the sold commodity to the buyer should be certain
and should not depend on a contingency or chance. For example, if A
sells his car, which has been snatched, to a person in the hope that
he will manage to get it back, the sale is void.
13. A certain price is stipulated once and for all. For example, A says to B:
“If you pay in one month, the price is $50 and if in two months, the
price will be $55”; as the price is uncertain, the sale is void. A can
give the two options to B, but B must select one option to have one
definite price to validate the sale.
14. The sale must be unconditional. A conditional sale is invalid, unless
the condition is a part of any usual practice of trade not expressly
prohibited by the Shar¯ı´ah.
Murabaha & Musawamah
Conditions of Valid Bai
(Cont’d)
There are also certain other conditions which are applicable to each
form of sale separately. The conditions related to Bai‘ Murabaha are
discussed in next slides:
Murabaha & Musawamah
MURABAHA- A BAI AL AMANAH
Murabaha & Musawamah
Murabaha- A Bai Al Amanah
Forms of Bai‘ can be described from the point of view of the cost of
any item to the seller –we may call it the original cost. Since the
original cost or purchase price is the starting point in Bai‘ Murabaha,
it is appropriate to refer briefly to all such lawful forms of Bai‘ which
become effective with express mention of the original cost. Such a
classification of Bai‘ includes Tawliyah, Wadhi‘ah or Mohatah and
Murabaha. These forms require an honest declaration of the cost by
the seller and as such are referred to in the Fiqh literature as Buyoo‘
al Am¯an¯at (fiduciary sales). Among fiduciary sales, Tawliyah means
resale at the stated original price with no profit or loss to the seller.
Wadhi‘ah or Mohatah means resale at a discount from the original
cost. The last one, Murabaha, is sale with a fixed profit margin over
the cost. Another, and the most common, form is Bai‘ Musawamah,
which is an ordinary sale and signifies sale for a price which is
mutually agreed upon between the seller and the purchaser
Murabaha & Musawamah
Murabaha- A Bai Al Amanah
(Cont’d)
without any reference to the purchase price/cost to the seller. In
other words, it refers to bargaining on price of the commodity being
traded. All these forms could be either on a spot or deferred
payment basis. While in Musawamah the parties freely agree on the
price, in Murabaha the seller informs the buyer of his original cost
and the parties agree on a stipulated profit to be added to that cost.
Murabaha & Musawamah
BAI MURABAHA IN CLASSICAL LITERATURE
Murabaha & Musawamah
Bai Murabaha in Classical Literature
Murabaha is derived from Ribh, which means gain, profit or addition.
In Murabaha, a seller has to reveal his cost and the contract takes
place at an agreed margin of profit. This contract was practised in
pre-Islamic times. Imam Malik has mentioned this sale in AlMu’watta – the first formally coded book on traditions of the holy
Prophet (pbuh). A renowned Hanafi jurist Al-Marghinani has defined
Murabaha as “the sale of anything for the price at which it was
purchased by the seller and an addition of a fixed sum by way of
profit”. Ibn Qudama, a Hanbali jurist, has defined it as “the sale at
capital cost plus a known profit; the knowledge of capital cost is a
precondition in it. Thus the seller should say: ‘My capital involved in
this deal is so much or this thing has cost me (Dm) 100 and I sell it to
you for this cost plus a profit of (Dm) 10’. This is lawful without any
controversy among the jurists”.
According to Imam Malik, Murabaha is conducted and completed by
Murabaha & Musawamah
Bai Murabaha in Classical Literature (Cont’d)
exchanging goods and price including a mutually agreed profit
margin, then and there. It is important to observe that to him, no
credit is involved in Murabaha. Malik is as a whole do not like this
sale as it requires so many conditions, the fulfilment of which is very
difficult. However, they do not prohibit it. Imam Shaf’ie in Kitabul
Umm expanded this concept to include credit transactions. It has
been defined in similar words in other books of Fiqh. By definition,
therefore, it is basic for a valid Murabaha that the buyer must know
the original price, additional expenses if any and the amount of
profit. Accordingly, Murabaha is a contract of trustworthiness.
Murabaha & Musawamah
THE NEED FOR MURABAHA
Murabaha & Musawamah
The Need For Murabaha
Actually, Murabaha is meant for some restricted situations. AlMarghinani has suggested that the purpose of Murabaha (and
Tawliyah) is the protection of innocent consumers lacking expertise
in trade from the tricks and stratagems of cunning traders. A person
who lacks skill in making purchases in the market on the basis of
Musawamah is obliged to have recourse to a Murabaha dealer who
is known for his honesty in this particular type of trade, and thus
purchases the article from that person by paying him an agreed
addition over the original purchase price. This leaves the actual
buyer satisfied and secure from the fraud to which he was exposed
for want of skill. Hence, it is evident that the main purpose of this
form of Bai‘ is to protect innocent purchasers from exploitation by
cunning traders. Imam Ahmad prefers ordinary sale over Murabaha
in the following words:
Murabaha & Musawamah
The Need For Murabaha (Cont’d)
“To me, ordinary sale (Musawamah) is easier than Murabaha,
because Murabaha implies a trust (reposed in the seller) and seeking
of ease on behalf of the buyer, and it also requires detailed
description to the buyer; there is every likelihood that selfishness
may overcome the seller, persuading him to give a false statement or
that mistake may occur which makes it exploitation and fraud.
Avoidance of such a situation is, therefore, much better and
preferable”.
The same ideas have been expressed by a Jafari jurist on the
authority of Imam Hussain ibn Ali. After basing the sale price on the
original cost of the goods to the seller, the purchaser is provided
with a modicum of protection against unjust exploitation by
unscrupulous merchants. It is important to observe, however, that
modern Murabaha is conducted mainly by banks and financial
institutions on a deferred payment basis. Upon execution of
Murabaha & Musawamah
The Need For Murabaha (Cont’d)
Murabaha, a receivable is created that becomes the liability of the
customer. The aspect of disclosing details of the banks’ cost price,
though a necessary condition of Murabaha, does not remain a
serious issue between the parties, particularly in view of the fact
that the customer himself is involved one way or the other in
locating and purchasing the goods.
Murabaha & Musawamah
SPECIFIC CONDITIONS OF MURABAHA
Murabaha & Musawamah
Specific Conditions of Murabaha
It is quite obvious that a transaction under Murabaha should meet
all the general conditions applicable to an ordinary sale. The specific
conditions regarding lawful transactions of Murabaha pertain to the
goods subject to Murabaha, the original price paid by the seller, any
additional costs to compute the total costs serving as the basis of
Murabaha and the margin of profit charged on the cost so
determined. An account of these conditions follows:
1. Goods to be traded should be real, but not necessarily tangible.
Rights and royalties are examples of non tangibles that can be traded
through Murabaha, as they have value, are owned and can be sold
on credit.
2. Any currency and monetary units that are subject to the rules of Bai‘
al Sarf cannot be sold through Murabaha, because currencies have
to be exchanged simultaneously.
Murabaha & Musawamah
Specific Conditions of Murabaha
(Cont’d)
3. Similarly, credit documents that represent debt owed by someone
cannot be the subject of Murabaha, first because debt cannot be
sold except when it is subject to the rules of Hawalah and second
because any profit taken on the debt would be Riba.
4. The seller must state the original price and the additional expenses
incurred on the sale item and he must be just and true to his words.
The additional expenses such as transport, processing and packing
charges, etc. that enhance the value of the commodity in any way,
and that are added as a custom by the merchant community in the
original price, can be added into the purchase price to form the basis
of Murabaha. It is, however, requisite that the seller, in making or
including such an addition, should say: “This article has cost me so
much”, and not: “I have purchased this at such a rate,” because the
latter assertion would be false.
Murabaha & Musawamah
Specific Conditions of Murabaha
(Cont’d)
The traditional jurists had some differences in this regard. The Hanafi
school permits the seller to include in the base price of Murabaha all
expenses he has incurred in relation to it, which have somehow
modified the object (tailoring, dyeing for cloth) and those which
have not modified it but were nevertheless incurred for the object’s
sake (transportation, storage costs, commission). The Malik is divide
the expenses into three groups: expenses that directly affect the
object of the sale and that can be added to the base price of the
object; expenses that are incurred after the profit has been
calculated and do not directly alter the sale object, like services
which the seller might not have provided himself (transportation and
storage expenses), which can also be added and expenses which
represent the services that the seller could have provided himself
but did not provide, such as packing charges, sales commission, etc.
– these cannot be added.
Murabaha & Musawamah
Specific Conditions of Murabaha
(Cont’d)
According to Shafi‘es also, the expenses of the last category cannot
be added to the cost. The Hanbalis’ view is more pragmatic,
according to which all expenses can be added with mutual consent,
provided the buyer is informed about the break-down of these
expenses.
5. The prospective seller in Murabaha is required to disclose all aspects
relating to the commodity, any defects or additional benefits and the
mode of payment to the original seller/supplier. All schools of
thought are unanimous on the point that the buyer in Murabaha
ought to be informed if the original price was on credit, since credit
prices are often higher than cash prices. All also agree that the
original purchase price deliberately inflated violates the concept of
Murabaha. If an Islamic bank receives a rebate for goods purchased,
even after the Murabaha sale of such a contract, the client/buyer is
entitled to benefit from the rebate as well.
Murabaha & Musawamah
Specific Conditions of Murabaha
(Cont’d)
6. The margin of profit on the price so reached has to be mutually
agreed upon between buyer and seller. The price, once fixed as per
agreement and deferred, cannot be further increased except for
rebate received from the supplier as mentioned above.
7. Any Majhul (unspecified) price cannot become a basis for Murabaha,
as it involves the semblance of uncertainty which renders Murabaha
sale unlawful. It is, therefore, a prerequisite that the price or cost
paid by the seller must be expressed in identical units, such as
dirhams and dinars, or specific articles of weight or measurement;
because if the original price is an article of which all the units are not
similar, the exact price at which the original buyer has become
owner of the article will remain unknown.
8. If the seller gives an incorrect statement about the original
price/cost of goods, the buyer, according to Imam Malik, may rescind
the sale unless the seller returns to him the difference between his
Murabaha & Musawamah
Specific Conditions of Murabaha
(Cont’d)
his real and the stated cost, in which case the sale is binding. The
Hanafis give the buyer the unqualified option to rescind, while the
Hanbalis consider the sale binding after the return of the difference
between the correct and the stated costs. The Shafi‘es have two
versions, one of which agrees with the Hanbalis and the other with
the Hanafis.
9. The purchaser in Murabaha has the right of option, even in the
absence of this condition or its stipulation in the contract. If he
discovers that the seller has defrauded him by false statement
regarding particulars of the article, its price, additional expenses or if
the seller himself has bought the commodity on a deferred payment
basis and sold it on prompt payment without informing him, or if any
practice on the part of the seller involves the semblance of illegal
sale, the purchaser will be at liberty either to accept or reject the
bargain as he pleases If, however, the purchaser detects cheating
Murabaha & Musawamah
Specific Conditions of Murabaha
(Cont’d)
after he has used that commodity or it has been destroyed in his
hands, he is not entitled to make any deduction from the price
according to Imam Abu Hanifa and his disciple Muhammad, because
the commodity against which he has to practise his right of option
does not exist. According to Abu Yusuf and Ibn-abi-Laila, also Hanafi,
deduction will be made even after the destruction of the
commodity. The message we get from the above is that Murabaha is
a lawful kind of sale but has its own limitations. The Medieval
Murabaha was not a mode of financing, it was a kind of trade.
Contemporary jurists have accepted it as a mode of business and an
alternative to financing with certain limitations. These relate to the
level of transparency and justice which Islam ordains for commercial
activities. It is in view of this requirement that Maliki fuqaha
consider this form of sale Naqis (defective). This means that the
permissibility of Murabaha is not as absolute as is the case of
Murabaha & Musawamah
Specific Conditions of Murabaha
(Cont’d)
ordinary sale. There is no doubt that jurists have justified Murabaha
on the grounds that it provides protection to the innocent, unskilled
and inexperienced purchasers, but as we do not find any reference
regarding its prohibition for experienced people or traders, it can
therefore be adopted subject to the fulfilment of the juristic
conditions, as an alternative to interest-bearing transactions for
those activities which the Shar¯ı´ah boards of various banks may
allow.
Murabaha & Musawamah
Thank You….
Murabaha & Musawamah