Murabahah As A Mode Of Islamic Finance

Abstract

A strong economy is directly linked to its banking system, because the more banking set-up exists in the country, the more transactions take place. Resultantly, it causes more money circulation and circulation of money in market is one indicator of the stable economy. All this is to avoid ‘interest’ because interest is not permissible in Islamic Shariah.  Interests in known as second major sin after shirk. In order to avoid interest, Islam provides many ways of funding as an adequate substitutes that have laid their foundation on the principle of allocating return and cost.

There are several ways of funding in Islam and one amongst them is Murabaha. This approach has one distinguishing feature from common transaction. In Murabaha contract, bank has to issue actual price of the goods as well as profit added on it. While in case of general sale, the financial institutes don’t follow the same.

Many scholars of Islamic Shariah are agreed that Murabaha is permissible and is a renowned source of sponsoring business transactions which is based on following points:[1]

1. It is not lending and accepting transaction with bank, but a sale transaction.


2. Islam forbade such money is not permissible which comes charging as penalty on late payment of principle amount where in Murabaha no penalty or extra amount charge to customer but he enjoys grace days for late payment.


3. The risk remains with banks till the possession of goods not handed over to customer, even though customer paid fully to bank.


4. In case, customer denies the transaction bank cannot bind him to buy the product, and loss will be handled by banks.

[1] Brian Kettell. Introduction to Islamic banking and finance. 1^st Edition 2008, Harriman House Publisher, Chapter# 4, p.48