In continuation of our discussion on Islamic Finance products as alternatives to conventional ones, our focus this month will be on Murabaha. MURABAHA Murabaha is the most widely used Islaamic finance instrument, as it can be structured to finance the acquisition of most assetssuch as office equipment, plant and machinery, vehicles, electronics, furniture, and soon. A Murabaha is a purchaseand resale of an asset at a stated profit. Basically, at the request of the client, the financier purchases an asset or commodity from a third party and sells it to him at an agreed profit.
It is convenient for the client because the financier buys the asset at his request and to his specification. A major distinguishing feature of Murabaha from other kinds of sale is that the financier expressly tells the client how much cost he will incur and how much profit will be charged. The profit in Murabaha can be determined by mutual consent, either in lump sum or through an agreed ratio of profit to be chargedover the cost. Repayment of the total amount agreed could be on a spot or deferred basis.Murabaha transactions are also known as mark-up or cost-plus financing and are structured to eliminate the need to take interest-based loans.
Another benefit of Murabaha is that apart from taking possession of the asset, the client also has ownership over the assetright from the beginning of the transaction even if he does not pay on the spot. For a sale contract to be Shariah compliant all the parties to the transaction have to bear some risk and for a Murabaha transaction to be valid, the financier has to take possession of the assets even if it is for a brief period, before he can resell. For a Murabaha sale to be valid, these conditions have to be fulfilled:
1. The subject of sale must be in existence at the time of sale, Example:Hassan sells the unborn calf of his cow to Sulaiman. This sale is void.
2. The subject of sale must be in the ownership of the seller at the time of sale. Thus, what is not owned by the seller cannot besold.
3. The subject of salemust beaproperty of value, which means that something that has no value according to the usage of trade cannot be sold or purchased.
4. The subject of sale must be specifically known and identified to the buyer.
5. The certainty of price is a necessary condition for the validity of a sale. If the price is uncertain, the sale is void
6. The sale must be unconditional. A conditional sale is invalid, unless the condition is recognized as a part of the transaction according to the usage of trade. Deferred payment in Murabaha (Bai Muajjal) When the payment price of a sale in a Murabaha is deferred, it is called a "Bai Muajjal". This is a very common form of Murabaha, which isused by most Islamic financial institutions to serve their customers needs because of the convenience of paying in arrears. Some conditions for Bai Muajjal For a Bai Muajfal transaction to be valid, the following conditions need to be fulfilled:
1.The due time of payment can be fixed either with reference to a particular date, or by specifying a period, e.g. every three months. If the time of payment is unknown or uncertain, the sale is void.
2. The deferred price may be more than the cashprice, but it must be fixed at the time of the sale.
3. Once the price is fixed, it cannot be decreased in case of earlier payment, nor can it be increased in case of default.
4. In order to ensurethat the buyer pays installments promptly, the buyer maybe asked to promise that in caseof default, he will donate some specified amount for a charitable purpose.
5. 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.
6. In order to secure the payment of price, the seller may ask the buyer to furnish a security whether in the form of a mortgage or in the form of a lien or a charge on any of his existing assets.
7. The buyer can also be asked to sign a promissory note or a bill of exchange.
Conclusion: Murabaha is a permissible way of funding the acquisition of assets without resorting to taking loans. The conditions guarding the validity of sale must be strictly adhered to as this will ensure that transactions are Shariah compliant. The financier works hand in hand with the client to ensurethat fairness prevails throughout the duration of the transaction.
This article was culled from the publications of Deen Communication Limited