Meaning and understanding of Murabaha

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CHAPTER II DESCRIPTION: GENERAL CONCEPT OF MURABAHA

A. Meaning and understanding of Murabaha

Murabahah or murabaha Arabic ةحبارم, more accurately transliterated as murābahah is a particular kind of sale, compliant with shariah, where the seller expressly mentions the cost heshe has incurred on the commodities for sale and sells it to another person by adding some profit or mark-up thereon which is known to the buyer. 29 As the requirement includes an honest declaration of cost. The point behind such a transaction is that some people, while knowing about prices have mutual trust in each other. Thus an intending buyer comes to a person and says, “I am willing to buy this merchandise from you, and I will give you such and such profit”. Then the deal is confirmed on this basis. 30 Typically, there are three parties, A, B and C, in a murabaha sale. A request B to buy some goods but promises to buy them from a third party, C. B is a middlemanwoman, and the murabaha contract is between A and B. This 29 Abdul Gafoor, Interest-Free Commercial Banking A.S NOORDIEN Malaysia 1996 pg 43 30 Ala‟ Eddin Kharofa, Transactions in Islamic Law A.S Noordien Kuala Lumpur 1997, pp162 36 murabaha contract is defined as a “sale of a commodity at the price which the seller B paid for it originally, plus a profit margin known to the seller B and A .” 31 Since its inception in Islamic law, the contract of murabaha appears to have been utilized purely for commercial purposes. Udovitch, as qouted by Saeed suggests that that murabaha is a form of commission sale, where a buyer who is usually unable to obtain the commodity he requires except through a middleman, or is not interested in the difficulties of obtaining it himselfherself, seeks the services of the middleman. 32 It is one of the most popular modes used by banks in Islamic countries to promote riba-free transactions. Different banks use this instrument in varying ratios. Typically, banks use Murabahah in asset financing, property, micro- finance and commodity import-export. 33 The seller may not use Murabahah if Mudarabah profit sharing or Musharakah joint venture is practicable. Since those profit-sharing modes of financing involve risks, they cannot guarantee banks any income. Murabahah, with its fixed margin, offers the seller i.e. the bank a more predictable income stream. A profit-sharing instrument, conversely, is preferable as it shares the risks more equitably between seller and buyer. 31 Jaziri, Kitab al- Fiqh ‘ala al-Mudhahib li al-Arba’a Cairo : al-Maktabat al-Tijariyya al-Kubra n.d pg 278-80 32 Abdullah Saeed, Islamic Banking and Interest, E,J Brill, Leinden, The Netherlands 1996 pg 76 33 http:en.wikipedia.orgwikiMurabaha 37 There are, however, practical guidelines in place which aim to ensure that the Murabahah transaction between the bank and the customer is one based on trade and not merely a financing transaction. For instance, the bank must take constructive or actual possession of the good before selling it to the customer. Whilst it can be justified to charge an additional margin to the customer to reflect the time value of money in terms of actual payment not being received from the customer at time zero, the bank can only impose penalties for late payment by agreeing to purify them by donating them to charity. 34 The accounting treatment of Murabahah, and its disclosure and presentation in financial statements, vary from bank to bank. In his book Ir. Adiwarman Karim explains Murabaha as an agreement in selling of goods by stating the cost and margins profits, which is agreed by both the seller and buyer. 35 The overall prices of goods that have been agreed are then paid by the buyer customer in installments. Ownership ownership of the assets is transferred to the customer buyer in proportion with the installment-payment being paid. Therefore, items purchased serves as collateral until the entire fee is paid.

B. Legal Foundations of Murabaha