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CHALLENGES IN MURABAHAH FINANCING There are many issues arises concerning of murabahah concept and need to discuss some

relevant issues with reference to the underlying Islamic principles and their practical applicability in murabahah transactions 1. Interest as Benchmark Rate Many institutions financing using murabahah determine their profit or mark-up on the basis of the current interest rate, mostly using LIBOR (Inter-Bank offered rate in London) as the criterion. LIBOR is the average interest rate that leading banks in London charge when lending to other banks. This practice is often criticized on the ground that profit based on a rate of interest should be prohibited as interest itself. The rate of interest has been used only as an indicator or as a benchmark. So long as the transaction of murabahah is based on Islamic principles and fulfils all its necessary requirements, the rate of profit determined on the basis of the rate of interest will not render the transaction as haram.

2. Security Another issue is that the murabahah price is payable at a later date. The seller or financier naturally wants to make sure that the price will be paid at the due date. For this purpose, he may ask the client to furnish a security to his satisfaction. The security may be in the form of a mortgage or a hypothecation or some kind of lien or charge. The basic rules of security by the bank as follows:

a) The security can be claimed rightfully where the transaction has created a liability or a debt. No security can be asked from a person who has no incurred a liability or debt. In the earlier stages of the procedure, the client does not incur a debt. It is only after the commodity is sold to him by the financier on credit that the relationship of a creditor and a debtor comes into existence.

b) It is also permissible that the sold commodity itself is given to the seller as a security. Some scholars are of the mentioned that this can only be done after the purchaser has taken its delivery and not before. It means that the purchaser shall take its delivery, either physical or constructive, from the seller, and then give it back to him as mortgage, so that the transaction of mortgage is distinguished from the transaction of sale.

3. Guarantee The seller in a murabahah financing can also ask the purchaser/client to furnish a guarantee from a third party. In case of default in the payment of price at the due date, the seller may have recourse to the guarantor, who will be liable to pay the amount guaranteed by him. There are two issues regarding of the guaranteeing in Islamic Banking: a) Under conventional banking, the guarantor will not guarantee a payment until a fee is paid by the original debtor. Classical fiqh mentioned that the guarantee is a voluntary transaction and no fee can be charged on a guarantee. Still it is permissible for the guarantor to recover his actual secretarial expenses incurred in offering the guarantee but the guarantee itself should be free of charge. The reason for this prohibition is that the person who advances money to another person as a loan cannot charge a fee for advancing a loan, because it falls under the definition of riba, or interest which is prohibited. b) Some contemporary scholars feel that guarantee has become a necessity, especially in international trade where the sellers and the buyers do not know each other, and the payment of the price by the purchaser cannot be simultaneous with the supply of the goods. There has to be an intermediary who can guarantee the payment. It is hard to find guarantor who can provide free service charge. In todays business activities, the guarantor sometimes needs a number of studies and a lot of secretarial work.

4. Rebate on Early Repayment. Sometimes the debtor wants to pay earlier than the specified date. In this case he wants to earn a discount on the agreed deferred price. Some earlier jurists have held this arrangement as permissible, but the majority of the Muslim jurists, including the four recognized schools of Islamic jurisprudence do not allow it, if the discount is held to be a condition for earlier payment. However, if the rebate is not taken to be a condition for earlier payment, and the bank gives a rebate voluntarily on its own, it is permissible.

5. Roll over in Murabahah Another rule which must be remembered is that the murabahah transaction cannot be rolled over for a further period. In an interest-based financing, if a customer cannot pay at the due date for any reason, he may request the bank to extend the facility for another term. The facility is rolled over on the terms and conditions mutually agreed at that point of time, whereby the newly agreed rate of interest is applied to the new term, only if the bank agrees. It means that another loan of the same amount is readvanced to the borrower. This practice should not be applied on Murabahah because it is not a loan. It is the sale of a commodity the price of which is deferred to a specific date. Once the commodity is sold, its ownership is passed onto the client. The roll-over in murabahah is nothing but interest-pure and simple-because it is an agreement to charge an additional amount on the debt created by the murabahah sale.

6. Penalty on Late Payments Another issue arises in murabaha financing is that if a client defaults in payment of the price at the due date, the price cannot be increased. In interest-based loans, the amount of loan keeps on increasing according to the period of default. But, in murabahah financing, once the price is fixed, it cannot be increased. According to the rules of Islamic fiqh, any amount charged over and above the dayn amount will be considered as riba.

Bank Negara has charge 1 percent from the total outstanding amount or the actual loss as compensation for default of payment and it shall be only charged once and should not be compounded.

7. Rescheduling of Payments If the purchaser/client in murabahah financing is not able to pay according to the dates agreed upon in the murabahah agreement, he sometimes requests the seller/ the bank for rescheduling the instalments. No additional amount can be charged for rescheduling and the amount of the murabahah price will remain the same in same currency.

COMPARISON BETWEEN BAI BITHAMAN AJIL (BBA) & MURABAHAH FEATURES Types and Purpose MURABAHAH Acquisition & Refinancing Working Capital &Trade Disclosure of Cost of Financing Existence of Goods at POS Repayment Mode Average Period of Financing Asset Recognition Full or Part Disbursement basis Asset Measurement Payment Amount Mark-up value Include both principal &income portion Deferral Profit Majority recognized in the balance sheet while other disclose in notes Segmental Information Disclosure by product type, industry and general pool fund Disclosure of profit rate None Early Settlement Accrued Income & classification Granted but not prevalent Most accrued in BBA receivables while some classify as other receivables Security Investment Deposit Treated as investment deposits and separate disclosures vary from balance sheet to notes None Granted but not prevalent Most accrued in receivables while some classify as other receivables Treated as investment deposits and separate disclosures vary from balance sheet to notes Market Value Include both principal &income portion Majority recognized in the balance sheet while other disclose in notes Disclosure by product type, industry and general pool fund Full or Part Disbursement basis Lump sum Short Term Most of goods exist Most of goods exist for Property Financing Deferred Payment Long Term Cost Disclosure BBA Acquisition & Refinancing Property Cost Disclosure

Recognition of accrued income

Most accrued income

Most accrued income

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