By definition, murabaha is a type of sale (ba’i or bay’) in which the seller candidly reveals to the buyer the cost of the underlying commodity (as originally incurred by the seller), on the agreement that a specific amount of profit (mark-up) will be added thereto. In this sense, murabaha is not an interest-bearing loan; it is, rather, a sale of a commodity for cash/deferred price.
Murabaha (cost-plus sale) can be misused in practice due to a number of shari’a violations or practical mistakes, including the following:
- The sale of murabaha commodity to the client or purchase orderer takes place before the commodity is procured by the financier (Islamic bank) from the supplier. Some banks mistakenly skip some murabaha stages, having documentation done all at a time. In essence, murabaha is a multi-stage contractual agreement- i.e., a combination of successive different contracts which come into effect one after another.
- The use of murabaha indiscriminately for all types of financing transactions. However, murabaha is only fitting when a commodity/ service is to be purchased by a client or purchase orderer. Murabaha cannot be used as a conventional financing tool.
- The commodity, object of sale in murabaha, is used fictitiously rather than actually. In other words, murabaha commodities do not leave their warehouses though documents show transactions have been carried out.
- Some financial institutions apply murabaha on commodities already owned by them. This violates the very nature of murabaha that can only be effected on not yet purchased commodities.
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