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Time Value of Money and Murabahah

Time Value of Money and Murabahah

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Published by Saiful Azhar Rosly
Time Value of money is recognized in Islam but this does not mean implicating Islamic banks into the payment and receipt of interest.
Time Value of money is recognized in Islam but this does not mean implicating Islamic banks into the payment and receipt of interest.

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Published by: Saiful Azhar Rosly on Aug 22, 2008
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 Time Value of Money and
/BBA profits
Saiful Azhar Rosly, Ph.D saiful@inceif.orgInternational Center For Education in Islamic Finance (INCEIF),MALAYSIA www. inceif.org
In conventional loans, the contractual interest rate is the sum of 
interest rate of deposits
overhead/transaction cost
inflation premium
default risk premiumIn the case of 
al-bai-bithamain ajil 
(BBA) facility, the Shariah can only recognize the overhead and profit margin elements. Both usually only command about 2% and 1% respectively. For smaller banks, the lack of scale economies may see higher overhead cost than larger size banks.Overall, the mark-up element should amount to about 3%.However, banks must also impute the cost of deposit factor. Since, nopromise to pay hibah and mudarabah profits is given, this naturally implies that Islamic banks need not worry about determining thecontractual rate of return to depositors. But how can this be if they candeclare upfront how much profit they want from each of the murabahahand BBA sale made?For example, the bank sells an asset for $200,00 on BBA credit term. Accordingly, the BBA or murabahah contract gave customers the rightto know the cost price. It is then not difficult to see that given the termsof maturity of say, 20 years, the profit rate per annum should amount to
10% with a nominal mark-up of $100,000.But now, the question is how should the bank explain the $100,000profit they make from the BBA sale as legitimate (
)? Recall the‘iwad or equivalent contervalue is the condition for a lawful sale. Any increase, according to the majority of jurists in the Shafi’, Hanafi,Maliki, and Hanbali schools must contain ‘iwad.To benefit from these increases, Islamic banks must be able to providesomething of equal value in return. Hence, when someone pays$200,000 on BBA financing at $100,000 cost price, what is the natureof ‘iwad he receives from the bank in exchange for the $100,000 profit?Certainly, if the transaction is made on the spot or cash basis, problemon the nature of lawful and unlawful gains should not have risen sinceno time element is involved here. Which means that the bank purchasesthe goods at direct or wholesale price, it assumes the risk of ownership. While doing so, the bank sells the goods to the customer for $200,000on cash term.The legitimacy of the profit made is irrelevant since the bank has indeeddelivered the ‘iwad equivalence. This shall be in the form of:
its ability to make the goods available in the market
absorbing market risks and risk of ownership (
daman milkiyah
).In the former, we are looking at the valued-addition(
) factor, whilelatter describes the ghorm or risk-taking aspects of sale.However in the BBA sale, it seems that the $100,000 profit is created onthe basis of time factor alone. To some extent, we failed to understandhow a profit rate of 10% can be determined ex ente when concurrently Islamic banks cannot declare ex ente the rates of return on deposits.

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