Murabahah in Islamic Commercial Law Application within Islamic Banking and Finance Industry - Essay Example

?A critical Analysis of Murabahah in Islamic Commercial Law Application within Islamic Banking and Finance Industry Issue of Murabahah and Opinions of Muslim Scholars and School of Thought: Islamic banking commenced its service with the personal effort of some Muslims who were concerned with the difficulties in riba. Now there are more than two hundred Islamic financial establishments all over the world. Actually, Murabahah is a term associated with Islamic Fiqh, which indicates to a particular type of sale, and it has nothing to do with financing. Islamic scholars still argue that, the structuring of Murabahah financing is rather different from the overdraft facility prepared along conventional lines as the former one offers numerous benefits to the bank and its customers. In fact, murabahah as a means of finance was permitted by the Sharia scholars with certain conditions. Unless these conditions are fully observed, murabahah is not allowable. According to Sharia, if the conditions are ignored, the transaction becomes void or worthless. “Murabaha is a sale contract for selling a specified item at a mutually agreed mark-up (profit) added to the purchase price” (Trade Based Financing Murabaha Cost-Plus Sale) n.d.). Issues in Murabahah 1. Securities against the Murabahah Payments received from sale are called receivables, and for this purpose, the clients are asked to provide a security. 2. Guaranteeing Murabahah The seller can request the client to provide a third party guarantee. The guarantee doesn’t have the option to charge fee from the client. The reason is that, a person who is charged with a fee for advancing loan may fall under the definition of riba. 3. Penalty of Non-Payment: In case a client fails to make payment of the fee on the due date, the fee should not be increased. “In Murabahah financing, once the price is fixed, it cannot be increased” (Important Issues Involved in Murabahah n.d.). 4. “Rollover in the Murabahah” (Roll Over in Murabahah 2011): Once a commodity is sold through Murabahah, its possession transfers from the bank to the client, and therefore the seller may not have any right on the property. The seller can claim only the price agreed. 5. Rebate on Former Payments: Occasionally some debtors often like to pay before time to obtain discounts. However within Islam, a large section of Muslim scholars as well as the major schools of thought regard this as un­Islamic. On the other hand, if the Islamic bank or the financial institution gives somebody a discount on its own, it is not offensive, particularly if the clients are needy. The Significant Issue in Murabahah Financing. The subject of debate among the modern Shariah scholars is that the bank or financier can go for a real sale while the client requests Murabahah financing from the bank, because the obligatory commodity, at this stage is not possessed by the bank, and the person cannot sell goods not possessed by him nor can he facilitate a forward sale. It is also decided that the commodity which is sold is given as a security to the seller. Some scholars have the opinion that this can be done only after the buyer has undertaken its delivery and not prior to that. Critically Discuss and Analyze the Discourse from the Different Legislations and Jurisdictions by Presenting the Islamic Finance Cases that Have Come Before the Courts. Islamic banking denotes a system of banking activity or banking that is reliable with the principles and rules of Islamic law (Sharia), and its practical application in the course of the growth of Islamic economics. “Sharia forbids” the payment of fees for lending cash (Riba, usury) on specific conditions, in addition to investing in businesses that offer goods or services measured contrary to its principles (Haraam, forbidden). At the same time, as these principles were employed as the support base for a flourishing financial system in earlier times, it is merely in the late 20th century that numerous Islamic banks were created to apply these principles to semi-private or private commercial institution in Muslim society. Murabaha is a structure in Islamic finance system in which one party purchases something for money and then sells it to some of the second party for delayed payments. Murabaha agreement is applied in Islamic banking industry in numerous ways including vehicle, personal financing, property, and corporate financing. Maybe most vital debate is whether private equity acquisitions and investments are fine for their targets, mainly by using leverage and characteristics such as liquidation preference and mandatory redemption. “During this same time, the Islamic finance industry has seen the establishment and growth of an Islamic private equity, and even more recently, an Islamic venture capital” (Moghul 2008). The study of Islamic finance offers a unique opportunity to study both the development of Islamic legal science, and the present struggle among moderate elements and fundamentalists over the role of Shari’ a law. “This process of legislation was hampered by the spread of Islam to geographically dispersed locales, and its assimilation with the ‘adat, or customary laws of the converted peoples.” (Riba in Islamic Jurisprudence 2004). The risk faced by Murabaha financing is the risk related to credit, the anticipated loss (EL) from exposures of Murabaha. The estimated loss is generally priced with the manufactured goods; therefore the risk of credit is imputed into the pricing mechanism of Murabaha. This form of transaction converts Murabaha into a less feasible one and more into a business form. As traditional Murabaha permits the setting of credit cost (price) more than cash price and the factors that necessitate the study elucidate the charging of premium of credit risk on Murabaha sales. The seller cannot employ Murabahah if musharakah or mudarabah are feasible. As those profit-sharing methods of financing entail risks, they can’t assure banks any revenue. Murabahah’s fixed margin provides the seller (i.e. the bank) a regular income stream. “A profit-sharing instrument, conversely, is preferable as it shares the risks more equitably between seller and buyer” (Murabahah in Islamic Finance 2010). The validity of the transaction in Murabaha depends mainly on certain circumstances, which must be correctly observed to keep the transaction obliged to Islamic law. With the aim of studying these circumstances properly, one must realize that Murabaha in Islamic commercial law is a sale which has its own implications, and that every basic constituent of a valid sale must be present in Murabaha too. Application of Morabaha in Islamic Commercial Law: Murabaha is a sale contract, whereby the seller prices percentage earnings on cost of goods sold. It is a suitable form of credit sale in Sharia. As in the form of arranging rents, the intermediary retains the possession of the assets until the loan is paid in full. “In order to stop riba, the mediator cannot be remunerated above the terms agreed upon the contract. Therefore, “if the buyer is late on their payments, the intermediary cannot charge any late penalties” (Murabaha 2012) this step is to enable Murabaha contract efficient in the business of short term trade financing or inventory, and it was necessary to depart rather from the traditional model by adding a promise to purchase on the part of a customer, with the real buy made by the bank of commodities from third party dealers. With the real Murabaha contract, an additional contract is appended; the promise to buy is made by the prospective buyer or client. It is generally explained as cost plus financing and normally appears as a type of trade economics using letters of credit. It contains sale of goods on a delayed basis. The commodities are delivered directly, and the cost to be paid will contain an equally agreed margin of profit due to the seller. In this agreement, the market cost is shared with the purchaser at the time of completing the sale. Implementation of Morabaha in Islamic Commercial Law: Murabaha contracts are in reality interest based agreements, under the guise of buyback transaction and in the garb of a notional sale. Islamic scholars argues by stressing the statement that “a true Murabaha financing structure is quite different from an overdraft provided by conventional banks” (Nasim 2004) and offers different advantages to the bank and to customers by providing depositors a share in the bank’s profits” Rules of Morabaha in Islamic Commercial Law: The topic of sale should be valid at the time of the sale. The seller should have the possession of the goods in question. The sale should be absolute and instant; no provisions for contingencies must be made part of the agreement. The subject of sale should be in constructive or physical possession of the seller. The sale should be unconditional, and the cost of the goods should be convinced. The commodities to be sold should reflect a price, and should be specific to the buyer, leaving no room for uncertainties among the parties. “The seller is more courteous in his dealings than others” (Murabahah Transaction is Explained 2011). The Murabaha form of finance manages in the subsequent way: The customer shapes an Islamic bank to obtain money to purchase a particular commodity. “The client would go and purchase the requisite commodity from market. This choice is not accessible to the Islamic bank, as it operates no interest basis. “It cannot lend the money on interest” (Murabaha on Shariah Ruling 1990). Solution of Murabaha in Islamic Commercial Law: The bank purchases the goods on cash, and sells it to the consumer on a profit. Because the consumer has no cash, he buys the goods on deferred payment basis. Therefore, the customer gets the goods he requires the Islamic bank, and the money spins some income on the amount it has used in obtaining the goods. “An Islamic Finance concept that is governed by Shariah principles (Islamic Banking 2012). It is an agreement among a bank and its customer, by which bank buys goods and then sells them to the customer at a cost which includes a margin of profit”. There are a certain set of guidelines for this deal to be a real contract. Moreover, it has to meet the Islamic standards of a legal sale. The entire process of Murabaha business is to be finished in two stages. In the first stage, the consumer needs the bank to take on a Murabaha deal, and promises to purchase the commodity specified by the consumer, if the bank obtains the same goods. Certainly, the promise is not a lawful binding. The customer can go back on his agreement and the bank is at risk of losing what it has spent. In the second stage, the customer buys the good obtained by the bank on a deferred payments basis and agrees to a payment plan. Another significant condition of Murabaha sale is that it has two sale agreements; one at the time when the bank obtains the goods and the other through what it sells to the customer and both have to be separate and real dealings. Reference List Important Issues Involved in Murabahah (n.d.). Islamic Commercial Laws. Available at < http://islamic-commercial-laws.blogspot.in/2011/11/important-issues-involved-in-murabahah.html> [Accessed on 04 May 2012] Islamic Banking (2012). United Arab Bank. Available at [Accessed on 04 May 2012] Moghul, UF (2008). Financial Innovations in the Muslim World. LexisNexis. Available at [Accessed on 04 May 2012] Nasim, F (2004). Prospects of Islamic Banking: Legal and Other Challenges and Issues. Cardiff Law School. Available at < http://www.hmco.com.pk/FAISALth.pdf> [Accessed on 04 May 2012] Riba in Islamic Jurisprudence (2004). The Fletcher School. Print. Roll Over in Murabahah (2011). IslamicBanker.com. Available at [Accessed on 04 May 2012] Trade Based Financing Murabaha Cost-Plus Sale) (n.d.). Print. Read More