Whether cost disclosure is mandatory in Murabahah, the Musawamah alternative where disclosure is not required, and the consequences of providing misleading cost and profit figures.
In-Depth Analysis
The question which aroused the interest of a reader is related to whether it is a must for any seller in Shariah compliant transactions to provide the breakdown of the selling price to the buyer without which no deal can take place. The answer: in Shariah, Murabahah is not the only contract available to a seller transacting with a buyer. The alternate structure for sale of readily available goods where the seller does not want to reveal the cost of goods and its profit is called 'Musawamah.' It is important to note that being akin to the 'rent to own' model in the conventional financial world where the purchase does not become the true owner until the loan is fully paid, this is not the case with Murabahah since the ownership is immediately shifted to the buyer and that the distorted payment terms agreed between the seller and buyer must not impact the transferability of the ownership. Nevertheless, as always the case, Shariah parameters provide an alternate option to protect a seller's interest in a deferred Murabahah transaction, that is to mortgage or pledge or lien the Murabahah asset in favor of the seller till such time that the full Murabahah amount is settled by the buyer. In this case, although the buyer shall become the title holder of the Murabahah asset, it shall not be able to further dispose of the same till full repayment of the Murabahah amount. There are several examples of Musawamah in our daily life: shopping for household items, grocery, clothes, furniture, electronics etc. where the retailer never conveys its cost of merchandise and profit. Families simply try to bargain and if they are lucky, the price is brought down by the seller in order to dispose of the goods. As to the other question about the seller providing misleading cost and profit figures to the buyer under a Murabahah-based transaction, although it is an Islamic transaction, the seller ought to be honest and pass on the correct figures. There is a possibility that the figures have been doctored so as to hide the actual profit being amassed from the transaction.
What You Need to Know
- 1Cost disclosure is required in Murabahah but NOT in Musawamah — seller has a choice
- 2Murabahah ownership transfers immediately to buyer (unlike rent-to-own)
- 3Seller can take a mortgage/lien on Murabahah asset as security until fully paid
- 4Musawamah is used in everyday retail — no cost disclosure required
- 5Misleading cost/profit figures in Murabahah is a serious ethical violation
- 6Buyer has the right to verify the seller's cost claims in Murabahah
U.S. Market Relevance
In US Islamic auto financing (Murabahah-based), the provider must disclose their cost and profit. Consumers should verify this disclosure. This transparency requirement is an advantage over conventional financing where the 'cost of funds' is opaque.
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