The concept of Murabaha in a modern Islamic context

Mahmoud, MS

Abstract

One of the main principles of Islamic Banking is to avoid
interest (usury) in all forms of transactions because
Muslims believe that they are not allowed to deal in usury
and that they have to adopt an interest-free system. In
order to achieve this, the Muslims have derived their guiding
rules from the Islamic principles and used profit sharing
mechanism rather than using the prevailing interest rate
mechanism. The Muslim Economists have been trying to
develope and present some successful real working examples of
an interest-free economy.
The usury "interest" is called in Islam "RIBA" a term which
literally means increase or addition but from the Islamic
technical point of of view it refers to the addition in the
amount of the principal of the loan on the basis of time for
which it is loaned and the amount of the loan.
The objective of the Islamic Banks and Investment Companies
is to develope Islamic forms of transaction that do not
involve interest which is prohibted in Islam. Islam has
nothing against the modern banking operational techniques or
against the cooperation or coordination with western
investment and banking institutions unless they conflict
with the Islamic rules.
The Quran, which is the fundamental source of the Islamic
rules and principles has prohibited Riba. One of the
implications of prohibition of Riba is that this prohibition
eliminates all debt financing instruments as they exist in
the traditional banking system. Islam has given some
alternative transactions which do not involve Riba dealing.
One of the important characteristics of the Islamic
financial instruments is the Risk and Loss and Profit
sharing.
The cause of the prohibition of Riba will be discussed in
detail in this study- The study will also list and explain
some of the main investment instruments and forms used in
the Islamic Banking.
One of the most important forms of transaction developed in
the Islamic Banks and Investment Companies is a form of sale
called Murabaha. Murabaha is the most widely used form of
transaction in the Islamic Banks and in the same time it is
the most frequently subject to criticism. The Murabaha
represents a special form of contracts for sale of goods.
It is a Contract of Sale where the seller is obliged to
disi cose to the buyer the initial cost of the goods and the
margin of profit he marked.
The objective of this study is to discuss this special form
of transaction, make comments on how it is being practised
in the Islamic Banks and Investment Companies.
Being a newly developed investment instrument, the Murabaha
in its modern application has not been the subject of many
books or researches. Many books and publications discussed
the subject of the Islamic Banking System but few of them
highlighted the issue of the moderm Murabaha which is a
different application of the old Islamic traditional form of
Murabaha. The most important publications in this field are
written recently after the Islamic Banks had adopted the
Murabaha Sale Contract in its developed form. One of the
books written in Murabaha is a book by DR. SAMI H. HOMOUD a
distinguished Islamic Banker in the year 1976. The book is
titled "DEVELOPMENT OF THE BANKING ACTIVITIES IN CONFORMITY
WITH THE ISLAMIC SHARIA". The book discussed and
highlighted all of the banking activities and was not
devoted to Murabaha. Another writer in this field is DR.
AHMAD A. ABDULLAH who, in the year 1987, wrote his book
"MURABAHA, its principles, conditions and applications in
the Islamic Banks". There are also some other Islamic
Economists who wrote about the Murabaha sale such as Dr.
Youssof Al Garadawi who wrote "Murabaha Sale to Purchase
Orderer as applied in Islamic Banks", DR. ABDUL HAMEED AL
BAALI, "The Jurisprudence of Murabaha" in addition to the
"Scientific and Practical Islamic Banking Encyclopedia"
issued by the International Institute of Islamic Banking &
Economics.".
There are some of the recent publications which discussed the
issue of Murabaha in the Islamic Banks and Investment Companies.
There are old publications and books that referred to and
explained this form of transaction. These are written by old
Muslim Thinkers and Jurists but, of course, they did not discuss
the modern applications of the Murabaha Contract as they were not
known at those early days. The Murabaha Contract has been dealt
with and discussed from different points of view which the writer
intends to discuss and elaborate in this study which will be
divided into four chapters.
The First Chapter will be concerned with explaining the concept
of the Islamic Banks and Investment Companies showing their main
characteristics and the points of difference between the Islamic
Banks and the Conventional Banks. The chapter also describes
some of the important islamic investment instruments which are
being applied in the Islamic Banks.
The Second Chapter of the study will be devoted to explain the
meaning of Murabaha both literally and in the Islamic Sharia and
the stand of the different Muslim Jurists towards the definition
of the Murabaha Contract. In the second part of this chapter, the
author will explain how the Murabaha Sale used to be practiced
in the early days of Islam and how it is being applied now a days
in the modern Islamic Banks and Investment Companies.
A detailed description of the transaction will be given in this
chapter showing how the transaction starts with a purchase order
from the client to the Bank which purchases the required goods
under its name, possesses them and then re-sells them to the
client.
The Second Chapter also includes the general and the special
conditions required to achieve a proper Murabaha Contract.
The general conditions are the conditions which apply to all
contracts regardless of their type such as the legal capacity of
the parties, offer and acceptance, valuable consideration and
that the contract should not involve any usury. On the other
hand, the special conditions are those which apply to the
Murabaha Sale Contract as a special form of contract. These
conditions include that the original purchase price should be
disclosed to the buyer, the initial contract must be a valid one
in accordance to the principles of the Islamic Sharia and that
the goods should be owned by the seller at the time of the Sale
Contract.
The third chapter of the study will contain the main problems
facing the application of the Murabaha Contract in the Islamic
Banks and Investment Companies showing that one of the main
issues in this regard is in the execution of the contract in the
Banks which, in many cases, affects the properness of the
Murabaha. The chapter will also involve in the points of
criticism which are raised against the application of this form
of transaction. Some of the main points of criticism include
that the Murabaha transaction involves usury, that it is a sale
of what the seller does not own and that the transaction in its
moden form was not known at the early days of Islam.
All criticisms will be discussed in detail and it will be shown
that some of them are true and genuine and some actions need to
be taken in order to rectify the transaction.
In the fourth chapter a summary of the findings of the study
will be given stating the writers opinion and recommendations for
the establishment of a proper application of the Islamic forms of
transaction especially for the Murabaha Sale of Goods. The most
important points relate to the qualifications, the concern and
the seriousness of the officials and the executives of the
Islamic Banks and Companies who should be always well trained in
the business so that they can be able to face the challenge.
-it

Citation

Mahmoud, M. The concept of Murabaha in a modern Islamic context. (Dissertation). Salford : University of Salford

• Thesis Type: Dissertation
• Deposit Date: Oct 3, 2012
• Award Date: Jan 1, 1990