Islamic banking has emerged as a transformative force globally, transcending the boundaries of Muslim-majority nations and capturing the attention of non-Muslim countries. In Bangladesh, the popularity of Islamic banking has reached heights, with eight full-fledged Islamic banks and 17 conventional banks engaging in Islamic banking activities.
One of the prevalent investment methodologies in Islamic banks is buying and selling, with Murabaha being the most commonly employed method. The term Murabaha is rooted in the Arabic word ‘Ribhun,’ denoting extra, surplus, or profit. In essence, Murabaha involves the sale of a product after its acquisition by the bank, incorporating a predetermined profit on the purchase price. The buyer is made aware of both the initial purchase price and the added profit associated with the Murabaha product.
To illustrate, consider an individual seeking to purchase a car. Rather than opting for an interest-bearing loan from the bank, an agreement is established wherein the bank procures the car and provides it to the buyer with a specified profit margin, such as 10 percent, added to the purchase price. Murabaha thus serves as an alternative, interest-free approach to acquiring assets, supported by the validity of such transactions in Islamic teachings, as evidenced by relevant hadiths.
This evolution in banking practices reflects a growing global recognition of the principles underlying Islamic finance, as demonstrated by the increasing adoption of Islamic banking not only in Muslim-majority nations but also in diverse financial landscapes worldwide.
In the case of Murabaha, only the goods can be delivered to the customer. If money is given to the customer instead of the product, then it becomes riba that is prohibited in Islam. Even if the bank appoints the customer as an agent to purchase the Murabaha item from the supplier, the bank is not permitted to give the money directly to the customer or into his account.
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) mentioned in his Shariah Standard No. 8 Murabaha Chapter under 3/1/4 that, “In cases when the customer is authorized to purchase the item as the Institution’s agent, it is obligatory to adopt procedures which would ensure that certain conditions are observed. These conditions include:
- a) the Institution itself must pay the supplier, and not pay the price of the item into the account of the customer as agent, whenever possible.
- b) the Institution should obtain from the supplier the documents that confirm that a sale has taken place.”
According to Islamic finance Murabaha is not a financing method; Rather, it is a special type of buying and selling. The best methods of finance which Islam has suggested to take it as financing method are ‘Mudaraba’ and ‘Musharaka’.
If the conditions of Murabaha are not fully followed, it will turn into prohibited riba for breaching the rules. Hence full practice of Murabaha is necessary. Many times it is seen that the practice of Murabaha is limited only on paper. The customer submits some papers, and the bank gives him money. If the customer is given money without giving the product, then it will be riba instead of buying and selling. This would be cheating in the name of Murabahar.
Many times, even though it is a Murabaha contract, the purchased product is delivered to the customer by the supplier instead of being taken over by the bank.
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) mentioned in his Shariah Standard No. 8 Murabaha Chapter under 3/2/1 that, “It is obligatory that the Institution’s actual or constructive possession of the item be ascertained before its sale to the customer on the basis of Murabahah. 3/2/2 The condition that possession of the item must be taken by the Institution (before its onward sale to the customer) has a specific purpose: that the Institution must assume the risk of the item it intends to sell. This means that the item must move from the responsibility of the supplier to the responsibility of the Institution. Similarly, it is obligatory that the pointwhen the risk of the item is passed on by the Institution to the customer be clearly identified, with reference to the stages in which the item is transferred from one party to another.”
It is essential to establish ownership of the bank in the product before selling it to the customer. Many times, the bank designates the customer as an agent to purchase the product, aiming to avoid the inconvenience of direct acquisition. The customer, in turn, buys the product as the bank’s representative. However, it becomes problematic when the customer takes the product to his house without possession of bank and without informing the bank and without the necessary contractual elements such as Ijab and Qabul. This practice is not permissible.
According to AAOFII “3/1/3 The original principle is that the Institution itself purchases the item directly from the supplier. However, it is permissible for the Institution to carry out the purchase by authorizing an agent, other than the purchase orderer, to execute the purchase; and the customer (the purchase orderer) should not be appointed to act as an agent except in case of a dire need.
Furthermore, the agent must not sell the item to himself. Rather, the Institution must first acquire title of the item and then sell it to the agent. In such a case, the provisions of item 3/1/5 should be observed.”
If the customer explains to the bank that they have purchased the product as an agent (representative), the bank, upon understanding, takes possession of it. It becomes permissible when the bank establishes its ownership after the completion of its duty as an agent and finalizes its Murabaha with the customer through acceptance.
According to His Highness Abdullah Ibn Umar (RA), the Prophet of Islam (peace be upon him) said, ‘One who buys something should not sell it before measuring it properly’ (Abu Dawud: 3/299). Narrated by His Highness Abdullah Ibn Abbas (RA), Mohammad, the Prophet of Islam (peace be upon him) also mentioned that no one should seize food after buying it, lest he sells it elsewhere. His Highness Ibn Abbas (RA) stated that in this case, all things are like food (Bukhari: 2/750; Muslim: 5/7).
In some cases, it is observed that a product is sold to the same customer at a higher price than it was purchased for. For instance, if the bank acquires a motorcycle from Abdullah for Tk 50,000 and subsequently sells it back to Abdullah for BDT 55,000, such a practice is deemed illegal. Furthermore, when the bank purchases the motorcycle, the initial transaction becomes void if there is a condition stipulating that the motorcycle must be sold back to the original seller (Abdullah).
According to AAOIFI “2/2/3 The Institution must ensure that the party from whom the item is bought is a third party other than customer or his agent. For example, it is not permitted for a customer to sell an ordered item to the Institution and then repurchase it through a Murabahah transaction. Nor may the party that is supplying the item be wholly, or by way of majority [more than 50%], owned by the customer. If a sale transaction takes place and later on it is discovered that it was carried out through such practices, this would render the transaction void as it is tantamount to “Inah”.
If a loan is not repaid on time, conventional banks often calculate interest for the next term by combining it with the accrued interest. This process, known as ‘rollover,’ involves interest continuing to accrue at a compound rate until the loan is repaid.
However, Islamic banking does not permit such practices. Once the price of a product has been fixed in an Islamic banking contract, it is not permissible to re-fix the price while the contract is in existence. This principle is rooted in Islamic economic principles, as mentioned in ‘Modernization of Islamic Economics’ on page 470.
In many cases, customers are influencing the financing strategy, opting for the trend of receiving money directly without acquiring goods from the bank. The primary goal of Islamic banking is to avoid the sin of usury, but strategically taking money without purchasing goods in Murabaha contradicts this objective. Such a practice compromises the interest-free nature of Murabaha, transforming it into an interest-based loan. Therefore, to ensure that Murabaha transactions adhere strictly to Shariah principles, sincerity is crucial on the part of both bank officials and employees, as well as customers.
Disclaimer: Views expressed in this article are solely of the author and may not necessarily reflect the editorial policy of this newspaper.
Quite surprised seeing this article in this newspaper, which has been violently opposing Islamic banking.
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