Mufti Muhammad Shoaib

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%, 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 which 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.

According to Islamic finance, Murabaha is not a financing method; but rather, it is a special type of buying and selling. 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. 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, the point when the risk of the item is passed on by the Institution to the customer must be clearly identified, concerning 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 the bank and without informing the bank and without the necessary contractual elements such as Ijab and Qabul. This practice is not permissible.

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 finalises its Murabaha with the customer through acceptance.

In some cases, it is observed that a product is sold to the same customer at a higher price than it was purchased for. 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.”

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 ‘roll over’, 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 bank officials and employees, as well as customers.
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The writer is the media researcher at the Emirates Centre for Strategic Studies and Research