Religious justification
While orthodox Islamic scholars have expressed a lack of enthusiasm for ''murabaha'' transactions, calling them "no more than a second best solution" (the objection of the infidels ... was that when they increase the price at the initial stage of sale, it has not been held as prohibited but when the purchaser fails to pay on the due date, and they claim an additional amount for giving him more time, it is termed as "riba" and haram. The Holy Qur'an answered this objection by saying: "Allah has allowed sale and forbidden riba." Usmani, ''Historic Judgment on Interest'', 1999: para 219Usmani states that while it may appear to some people that allowing a buyer more time to pay for some product/commodity (deferred payment) in exchange for their paying a higher price is effectively the same as paying interest on a loan, Usmani, ''Historic Judgment on Interest'', 1999: para 223 this is incorrect. In fact, just as a buyer may pay more for a product/commodity when the seller has a cleaner shop or more courteous staff, so too the buyer may pay more when given more time to complete payment for that product or commodity. When this happens, the extra they pay is not ''riba'' but just "an ancillary factor to determining the price". In such a case, according to Usmani, the "price is against a commodity and not against money" — and so permitted in Islam. When a credit transaction is made ''without'' the purchase of a specific commodity or product, (i.e. a loan is made charging interest), the added charge for deferred payment is for "nothing but time", and so is forbidden ''riba''. Usmani, ''Historic Judgment on Interest'', 1999: para 225 However according to another Islamic finance promoter—Faleel Jamaldeen -- "murabaha payments represent debt" and because of that are not "negotiable or tradable" as Islamic finance instruments, making them (according to Jamaldeen) unpopular among investors. Jamaldeen, ''Islamic Finance For Dummies'', 2012:220
Islamic finance, use, variations
;Limits of use in fiqh In its 1980 ''Report on the Elimination of Interest from the Economy'', theere direct purchase from the supplier is not practicable for some reason, it is also allowed that he makes the customer himself his agent to buy the commodity on his behalf. In this case the client first purchases the commodity on behalf of his financier and takes its possession as such. Thereafter, he purchases the commodity from the financier for a deferred price. Usmani, ''Introduction to Islamic Finance'', 1998: p.73The idea that the seller may not use murâbaḥah if profit-sharing modes of financing such as
Variations
In addition to being used by Islamic banks, ''murabahah'' contracts have been used by Islamic investment funds (such as SHUAA Capital of Saudi Arabia and Al Bilad Investment Company), and sukuk (also called Islamic bonds)(an example being a 2005 sukuk issued by Arcapita Bank sukuk in 2005).''Bay' bithaman 'ajil''
(Also called ''Bai' muajjal'' abbreviated BBA, and known as credit sale or deferred payment sale). Reportedly the most popular mode of Islamic financing is cost-plus ''murabaha'' in a credit sale setting (''Bay bithaman 'ajil'') with "an added binding promise on the customer to purchase the property, thus replicating secured lending in `Shari'a compliant` manner." The concept was developed by Sami Humud, and shortly after it became popular Islamic Banking began its strong growth in the late 1970s. El-Gamal, ''Islamic Finance'', 2006: p.18 Another source (Skrine law firm) distinguishes between ''Murabahah'' and ''Bay' bithaman 'ajil'' (BBA) banking products, saying that in BBA disclosure of the cost price of the item being financed is not a condition of the contract. One variation on ''murabahah'' (known as "Murabahah to the Purchase Orderer" according to Muhammad Tayyab Raza) allows the customer to serve as the "agent" of the bank, so that the customer buys the product using the bank's borrowed funds. The customer then repays the bank similar to a cash loan. While this is not "preferable" from a Sharia point of view, it avoids extra cost and the problem of a financial institution lacking the expertise to identify the exact or best product or the ability to negotiate a good price.''Bay' al-Ina''
(Also ''Bay' al-'Inah''). This simple form of ''murabahah'' involves the Islamic bank buying some object from the customer (such as their house or motor vehicle) for cash, then selling the object back to the customer at a higher price, with payment to be deferred over time. The customer now has cash and will be paying the bank back a larger sum of money over time. This resemblance to a conventional loan has led to ''bay' al-ina'' being criticized as a ruse for a cash loan repaid with interest. It was used by a number of modern Islamic financial institutions despite condemnation by jurists, but in recent years its use is "very much limited" according to Harris Irfan.''Bay' al-Tawarruq''
''Tawarruq'' (also called a "reverse ''murabaha''" and sometimes a "commodity ''murabaha"'') also allows the banking customer to borrow cash instead of finance a purchase, Khan, ''Islamic Banking in Pakistan'', 2015: p.93 and has also been criticized by some jurists. Unlike a ''bay al-ina'' it involves another party in addition to the customer, Islamic bank and seller of the commodity. In ''Tawarruq'' the customer would buy some amount of a commodity (a commodity which is not a "medium of exchange" or forbidden in '' riba al-fadl'' such as gold, silver, wheat, barley, salt, etc.) from the bank to be paid in installments over a period of time and sell that commodity on the spot market (the commodity buyer being the additional party) for cash. (The commodity buying and selling is usually done by the bank on behalf of the customer, so that "all that changes hands is papers being signed and then handed back" according to one researcher). An example would be buying $10,000 worth of copper on credit for $12,000 to be paid over two years, and immediately selling that copper to the third party spot buyer for $10,000 in cash. There are additional fees involved for the commodity purchases and sales compared to a cash loan, but the additional $2000 is considered "profit" not "interest" and so not ''Legal status
United States
In the United States theInterpretive Letter #867. November 1999 ... In the current financial marketplace lending takes many forms . ... murabaha financing proposals are functionally equivalent to or a logical outgrowth of secured real estate lending and inventory and equipment financing, activities that are part of the business of banking. El-Gamal, ''Islamic Finance'', 2006: p.15
Challenges and criticism
Orthodox Islamic Scholars such as Taqi Usmani emphasize that murâbaḥah should only be used as a structure of last resort whereMany institutions financing by way of ''murabahah'' determine their profit or mark-up on the basis of the current interest rate, mostly usingAnother pioneer,LIBOR The London Inter-Bank Offered Rate is an interest-rate average calculated from estimates submitted by the leading banks in London. Each bank estimates what it would be charged were it to borrow from other banks. The resulting average rate is u ...(Inter-bank offered rate in London) as the criterion.
Some of these modes of finance are said to contain some elements of risk, but all these risks are insurable and are actually insured against. The uncertainty or risk to which the business being so financed is exposed is fully passed over to the other party. A financial system built solely around these modes of financing can hardly claim superiority over an interest-based system on grounds of equity, efficiency, stability and growth.Mohammad Nejatullah SIDDIQI. Issues in Islamic BankingCirca_1999_the_Pakistan_Federal_Shariat_Court">eicester:_The_Islamic_Foundation,_UK,_1983,_p.52 Circa_1999_the_Pakistan_Federal_Shariat_Court_ruled_that_the_"mark-up_system_..._in_vogue"_among_banks_in_Pakistan_was_against_the_Islamic_injunctions.
Islamic_banks_face_a_serious_problem_with_late_payments,_not_to_speak_of_outright_defaults,_since_some_people_take_advantage_of_every_dilatory_legal_and_religious_device_..._In_most_Islamic_countries,_various_forms_of_penalties_and_late_fees_have_been_established,_only_to_be_outlawed_or_considered_unenforceable._Late_fees_in_particular_have_been_assimilated_to_riba._As_a_result,_'debtors_know_that_they_can_pay_Islamic_banks_last_since_doing_so_involves_no_cost'Circa 1999 the Pakistan#.html" ;"title="Federal Shariat Court">eicester: The Islamic Foundation, UK, 1983, p.52
Islamic_banks_face_a_serious_problem_with_late_payments,_not_to_speak_of_outright_defaults,_since_some_people_take_advantage_of_every_dilatory_legal_and_religious_device_..._In_most_Islamic_countries,_various_forms_of_penalties_and_late_fees_have_been_established,_only_to_be_outlawed_or_considered_unenforceable._Late_fees_in_particular_have_been_assimilated_to_riba._As_a_result,_'debtors_know_that_they_can_pay_Islamic_banks_last_since_doing_so_involves_no_cost'_ Warde_also_complains_that_#">Warde,_''Islamic_finance_in_the_global_economy'',_2000:_p.163
"Many_businessmen_who_had_borrowed_large_amounts_of_money_over_long_periods_of_time_seized_the_opportunity_of_ Islamicization_to_do_away_with_accumulated_interest_of_their_debt,_by_repaying_only_the_principal_--_usually_a_puny_sum_when_years_of_double-digit_inflation_were_taken_into_consideration.Some_suggestions_to_solve_the_problem_include_having_the_government_or_the_central_bank_penalizing_defaultors_"by_depriving_them"_of_the_use_of_"any_financial_institution"_until_they_paid_up_(Taqi_Usmani_in_''Introduction_to_Islamic_Finance'')_--_although_this_would_require_a_completely_Islamized_society.
Islamic banks face a serious problem with late payments, not to speak of outright defaults, since some people take advantage of every dilatory legal and religious device ... In most Islamic countries, various forms of penalties and late fees have been established, only to be outlawed or considered unenforceable. Late fees in particular have been assimilated to riba. As a result, 'debtors know that they can pay Islamic banks last since doing so involves no cost'#">Warde, ''Islamic finance in the global economy'', 2000: p.163Warde also complains that
"Many businessmen who had borrowed large amounts of money over long periods of time seized the opportunity of Islamicization to do away with accumulated interest of their debt, by repaying only the principal -- usually a puny sum when years of double-digit inflation were taken into consideration.Some suggestions to solve the problem include having the government or the central bank penalizing defaultors "by depriving them" of the use of "any financial institution" until they paid up (Taqi Usmani in ''Introduction to Islamic Finance'') -- although this would require a completely Islamized society. Collecting late fees but donating them to charity, Collecting late fees only when the buyer "has deliberately refused to make a payment". ;Extra costs Because ''murabaha'' financing is “asset-based” financing (and must be to avoid riba according to orthodox Islamic thinking), it requires financiers to purchase and sell properties. But regulatory frameworks in most countries forbid financial intermediaries such as banks "from owning or trading real properties" (according to scholar Mahmud El-Gamal). Furthermore when the financier holds title to the property being sold it can be lost "if the financier is sued, loses, and declares bankruptcy", and this can happen when a customer has paid off most /almost all of the product/property’s price. To avoid these dangers SPVs (Special-purpose entity">Special Purpose Vehicles A special-purpose entity (SPE; or, in Europe and India, special-purpose vehicle/SPV; or, in some cases in each EU jurisdiction, FVC, financial vehicle corporation) is a legal entity (usually a limited company of some type or, sometimes, a limited ...
See also
*References
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Citations
Books, documents
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