Murabahah in modern Islamic banks and financial institutions

In-Depth Analysis

After having familiarized ourselves with the notion of a Murabahah or 'cost plus sale' Shariah transaction, we shall now have a glance at the parameters of this very widely used form of financing by Islamic banks and Islamic financial institutions. There are certain do's and don'ts on entering into a Murabahah contract by an Islamic financial institution. In the modern world, these have been approved by a wide range of Shariah scholars and standard-setting bodies such as AAOIFI, the IFSB and the International Islamic Financial Market, and they might as well be considered as the unwritten global law on how a Murabahah transaction ought to be carried out. Key AAOIFI/IFSB standards for Murabahah: A customer of an Islamic financial institution (the buyer) is permitted to ask the Islamic bank to purchase the goods from a particular supplier (whom he/she trusts) for an onward sale to the customer on a Murabahah basis. The Islamic bank shall have the right to decline such a request and buy the goods from its own preferred source of supply, provided the specification and quality sought by the buyer under the Murabahah contract is not compromised. The promise to purchase from the customer before the Islamic financial institution purchases the required goods from the third-party supplier is to protect the bank's interest. This document can be amended by the customer pursuant to submission vis-à-vis the quality, price, deferment period and such. It may also be possible that the customer and supplier have already entered into a trading contract directly prior to the customer approaching the Islamic financial institution. Shariah fairness requires that if the customer insists that the Islamic financial institution procures goods from a particular source, the Islamic financial institution shall not be responsible to bear the consequences if the goods turn out to be inferior. The Islamic bank may seek a security margin from the customer for extending the Murabahah financing. Such funds can be placed on a term deposit with the bank, and it will be broken in order to complete the Murabahah transaction and the customer shall be paid the profit whenever the bank undertakes the distribution of profit to customers.