The Holy Quran forbids interest but it permits Bai (Sale/trading). While earning through trade is allowed earning through lending of money is forbidden. One of the most popular modes of financing used by Banks and Financial in Islamic countries to promote ribah free financing is Murabaha.
Murabaha" is, in fact, a term of Islamic Fiqh and it refers to a particular kind of sale which has nothing to do with financing in its original sense. If a seller agrees with his purchaser to provide him a specific commodity at a certain cost which includes his profit, it is called a "murabaha" transaction. The basic ingredient of "murabaha" is that the seller discloses the actual cost he has incurred in acquiring the commodity, and then adds an element profit thereon. This profit may be in lump sum or may be based on a percentage. The payment in the case of murabaha may be at spot, and may be on a subsequent date agreed upon by the parties. Therefore, murabaha does not necessarily imply the concept of deferred payment, as generally believed by some people who are not acquainted with the Islamic jurisprudence and who have heard about murabaha only in relation with the banking transactions.
Murabaha, in its original Islamic connotation, is simply a sale. The only feature distinguishing it from other kinds of sale is that the seller in murabaha expressly tells the purchaser how much cost he has incurred and how much profit he is going to charge in addition to the cost.
If a person sells a commodity for a lump sum price without any reference to the cost, this is not a murabaha, even though he is earning some profit on his cost because the sale is not based on a "cost-plus" concept. In this case, the sale is called "Musawamah".
This is the actual sense of the term "Murabaha" which is a sale, pure and simple. However, this kind of sale is being used by the Islamic banks and financial institutions by adding some other concepts to it as a mode of financing. But the validity of such transactions depends on certain conditions which should be duly observed to make them acceptable in Shari‘ah.
In order to understand these conditions correctly, one should, in the first instance, appreciate that murabaha is a sale with all its implications, and that all the basic ingredients of a valid sale should be present in murabaha also.
Some Basic Rules of Sale
Basic principles governing Morabaha are as under
'Sale' is defined in Shariah as 'the exchange of a thing of value by another thing of value with mutual consent.
The subject of sale must be existing at the time of sale.
The subject matter of sale must be in the ownership of the seller at the time of sale and he must have a good title to it.
The subject of sale must be in the physical or constructive possession of the seller when he sells it to another person.
The sale must be instant and absolute.
The subject matter of sale must be an item of value. Thus an item having no value according to usage of customary trade cannot be sold or purchased.
The subject matter of sale should not be an item whose use is forbidden (Haram) by Sharia.
The delivery of the sold commodity to the buyer must be certain and should not depend on a contingency or chance.
The certainty of price is a necessary condition for the validity of sale. If the price is uncertain, the sale is void.
The sale must be unconditional. A conditional sale is however valid if the condition is recognized as a part of the transaction to the usage of trade.
Bai‘ Mu’ajjal (Sale on deferred payment basis)
A sale in which the parties agree that the payment of price shall be deferred is called a "Bai‘ Mu’ajjal".
Bai‘ Mu’ajjal is valid if the due date of payment is fixed in an unambiguous manner.
The due date of payment can be fixed either with reference to a particular date, or by specifying a period, like three months, but it cannot be fixed with reference to a future event, the exact date of which is unknown or is uncertain. If the time of payment is unknown or uncertain, the sale is void.
If a particular period is fixed for payment, like one month, it will be deemed to commence from the time of delivery, unless the parties have agreed otherwise.
The deferred price may be more than the cash price, but it must be fixed at the time of sale.
Once the price is fixed, it cannot be decreased in case of earlier payment, nor can it be increased in case of default.
In order to pressurize the buyer to pay the installments promptly, the buyer may be asked to promise that in case of default, he will pay some specified amount for a charitable purpose.
If the commodity is sold on installments, the seller may put a condition on the buyer that if he fails to pay any installment on its due date, the remaining installments will become due immediately.
In order to secure the payment of price, the seller may ask the buyer to furnish security whether in the form of a mortgage or in the form of a lien or a charge on any of his existing assets.
The buyer can also be asked to sign a promissory note or a bill of exchange, but the note or the bill cannot be sold to a third party at a price different from its face value.
Other Principles
Murabaha is a particular kind of sale where the seller expressly mention the cost of the sold commodity, and sells it to another person by adding some profit or mark-up thereon.
The profit in Murabaha can be determined by mutual consent, either in lump sum or through an agreed ratio of profit to be charged over the cost.
All the expenses incurred by the seller in acquiring the commodity like freight, custom duty etc. shall be included in the cost price and the mark-up can be applied on the aggregate cost. However, recurring expenses of the business like salaries of the staff, the rent of the premises etc. cannot be included in the cost of an individual transaction. In fact, the profit claimed over the cost takes care of these expenses.
The financial institution for a Murabaha transaction, according to Shariahs is that the Modaraba itself purchases the commodity and keeps it in its own possession, or purchases the commodity through a third person appointed by it as agent, before it sells the commodity to the client. However, it is also allowed that the Modaraba makes the client its agent to buy the commodity on its behalf. In this case the client first purchases the commodity on behalf of the Modaraba and takes its possession as such. Thereafter, he purchases the commodity from it for a deferred price. His possession over the commodity in the first instance is in the capacity of an agent. In this capacity he is only custodian while the ownership vests in the Modaraba and the risk of the commodity is also borne by the Modaraba as a logical incidence of ownership. But as soon as the client purchases the commodity from the Modaraba, the ownership, as well as the risk, passes to the client.
