Advertisements
murabaha

What is murabaha in banking?

ad

What is murabaha in banking?

Technically Murabaha is Purchase and resale at Profit . It is selling something at more than its cost price. Murabaha means that the seller provides the prospective buyer with details of their costs and the amount of mark-up, or profit, that the seller will make. One of the requirements for using this technique is that the details provided must be accurate and honest.

For example:

The financier (suppose yourself ) will purchase the goods from the supplier.The financier may then personally go and take possession of the goods or appoint a third party (Wakeel) to take possession of the goods on his behalf. For purposes of practicality, the financier may even appoint the delivery company (who deliver the goods to the grocer) as his Wakeel. Thereafter, the financier will effect a sale between himself and the grocer on a cost plus profit basis(Murabaha). The above procedure is called Murabaha Financing.

Murabaha meaning

Murabaha is derived from the Arabic root word (rabiha), which means to grow in business and succeed. Making profit is the measurement of that success (see Ibn Mandhoor, 2003). Therefore, the generic term Murabaha is often linked to the declaration of profit as a way of measuring the success of a sale transaction and the return on the exchange of money with commodity. In the classical Arabic dictionaries, Murabaha is often used to describe the sale transaction, where the profit amount is known and declared, for example, when a trader says: I will sell you this commodity with a profit of one dirham for every ten dirhams ( Ibn Mandhoor, 2003)

Term Murabaha first used:

Murabaha sales are mentioned in the first known book of Islamic jurisprudence, the Al-Muatta’a of Imam Malik ibn Anas (d. 795 CE). In Al-Muatta’a, under the book of sales, there is a chapter on the Murabaha sales, in which the Imam discusses matters related to selling of textile with a declared profit and a known cost, and he elaborated on certain questions raised on this kind of sale, where the profit amount is known and agreed by both parties.

How is Murabaha sale different than other sale

The distinguishing feature of Murabaha from ordinary sale is that The seller discloses the cost to the buyer and a known profit is added.

Advertisements

In principle, a Murabaha transaction falls under the category of a regular buy-and-sale transaction. Profit in Arabic is translated to Ribh. As such, it has been termed “Murabaha” as the seller discloses the amount he has paid to acquire the commodity as well as his mark-up (ribh). Being a regular transaction, the condition of validity rests on two factors, ownership, and possession. If both are found, then as a valid sale, the profit will be halal. The time for ownership is not limited to a specific time frame. Rather, a moment of time is sufficient.

Basic rules for Murabaha financing:

  • Asset to be sold must exist.
  • Sale price should be determined.
  • Sale must be unconditional.
  • Assets to be sold: a) Should not be used for un-Islamic purpose. b) Should be in ownership of the seller at the time of sale; physical or constructive.

How is profit made in Murabaha?

Instead of lending out money, the capital provider purchases the desired commodity (for which the loan would have been taken out) from a third party and resells it at a predetermined higher price to the capital user. By paying this higher price over instalments, the capital user has effectively obtained credit without paying interest.

Here is step by step model of Murabaha finance

The client approaches bank and expresses his intention for murabaha agreement.

  • The bank performs a preliminary credit assessment
  • The bank appoints the customer as its agent to negotiate the price and terms for the purchase agreement on its behalf.
  • On the closing date, the bank purchases the property and assumes all risks associated with the property.
  • The bank sells the property to the client at an agreed sale price
  • The property is mortgaged as security (rahn) against the payment of the purchase price.
  • The customer makes monthly payments over the agreed term.
  •   Once all payments have been made in full, the mortgage security is discharged.

Read Books on islamic banking and Finance

what is murabaha in banking?

Murabaha Deposit

Murabaha Deposit is an Islamic short-term investment product based on the concept of Murabaha.

Murabaha Deposit allows you to make a healthy profit on your money in a safe and Shariah-Compliant manner. The Bank enters into a contract with you to invest your money in a selected commodity at an agreed price. You make a profit by selling the commodity at a future date at a higher price.

Murabaha Bonds

A financial instrument proposed for obtaining debt by the government (generally in Islamic countries) within the interest-free framework. The certificate can be issued by the government in the following manner: The government may appoint one of its agencies to procure goods and services for it. The agency will float murabahah bonds and collect public funds. With these funds, it will procure goods and services and sell them to the government on a mark up. The certificate holders will be entitled to profit on the sale

“Murabaha Receivables”

In a contract of murabahah, the amount of debt due from the customers at the end of the financial period less any provision for doubtful debts is called Murabaha recievables.

What do Scholars say about Murabaha in banking?

Some Scholars including Mufti Taqi Uthmani sahab permit the Murabaha Investing options but banking murabaha has some controversy too.

If you like the article consider sharing it. Your single share means a lots to us.Republishing the article is permitted on the condition of proper attributes and link.

Do you want to get a Weekly magazine? You can subscribe to get a weekly email with our recent articles.

Follow us in our Social media Profiles: (facebook @islamhashtag), (instagram @islamhashtag ) and (pinterest @islamhashtag )

Advertisements
ad

Islam Hashtag

Our articles are based on Hanafi school, Positive news of Muslim Ummah and research on modern day issues faced by the muslims. May Allah accept it from us and benefit you through our articles and resources.

Leave a comment.