Fundamentals of Islamic Finance and Banking

CHAPTER 4Murabaha

Learning outcomes

Upon completion of this chapter, you should be able to:

1. Define Murabaha, the types of Murabaha, including Tawarruq or reverse Murabaha, and key conditions of the Murabaha contract.
2. Describe the Murabaha process for a standard contract and the Murabaha process commonly used by Islamic banks.
3. Discuss the practical applications of Murabaha and the challenges and problems faced by the product.
4. Compare the Murabaha contract with conventional loans.

INTRODUCTION TO MURABAHA

Conventional banking treats money and commodities and their trading as the same. As discussed in earlier chapters, Islam views money differently from commodities. Money is only a medium of exchange with no intrinsic value, and on its own it does not satisfy any need. Meanwhile commodities have intrinsic value and satisfy some need. Commodities have differing qualities and can be identified by specifications when they are traded. A new or a used car of the same model are not the same, or of the same value, but a new or an old bank note are the same. As such, money cannot be treated as a commodity. Hence, pure lending of money and earning a fixed return on it, which is interest, is prohibited. Islamic finance requires each financial transaction to be linked to a real asset. When commodities are traded for credit, an excess can be charged according to the majority of Muslim scholars. The seller can charge a different price for a cash sale or a credit sale, where the ...