Muhammad Arif
Muhammad Arif: Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan.

Issues and modalities of Murhabah


Murabaḥah was originally a term of fiqh (Islamic jurisprudence) means for a sales contract where the buyer and seller agree on the markup (profit) or “cost-plus” price for the item(s) being sold. In recent decades it has become a term for a very common form of Islamic financing, where the price is marked-up in exchange for allowing the buyer to pay over time — for example with monthly payments (a contract with deferred payment being known as bai-muajjal). Murabaha financing is similar to a rent-to-own arrangement in the non-Muslim world, with the intermediary (i.e. the lending bank) retaining ownership of the item being sold until the loan is paid in full. There are also Islamic investment funds and sukuk (Islamic bonds) that use murabahah contracts.

An example of a murabaha contract is: A approaches a Murabaha Bank in order to finance the purchase of a Rs 10,000 automobile from “Cash-Only-Automobiles”. The bank agrees to purchase the automobile from “Cash-Only-Automobiles” for Rs100, 000 and then sell it to A for Rs 120,000 which is to be paid by A in equal installments over the next two years.

While the cost to A is approximately that of a 10% per year loan, the Murabaha Bank using this transaction maintain it is different because the amount that Ad owes is fixed and does not increase if he is delinquent on payments. Therefore, the finance is a sale for profit and not riba.

Another argument that murahaba is shariah compliant is that it is made up of two transactions, both halal (permissible):

Buying a car for Rs 100,000 and selling it for Rs120, 000 is allowed by Islam.
Making a purchase on a deferred payment basis is also allowed by Islam.

However, not mentioned here is the fact that the same car that is being sold for Rs120, 000 on a deferred payment basis is being sold for Rs100, 000 on a cash basis. So basically A has two options:

1.     “Cash-Only-Automobiles” will sell him the car for Rs100, 000 but are not willing to wait to receive the full price.

2.     The Murabaha Bank will sell him the car for Rs 120,000 and is willing to wait two years to receive the full price.

A’s choice to purchase from the Murabaha Bank reflects his desire to not pay the full price of the car today. In other words, he prefers to pay part of the price today and be indebted with the rest.

The Murabaha Bank agrees to be owed by A the price of his car in return for the amount that it is owed being Rs 20,000 more than the price of the car today.

Did the bank charge A a predetermined return for the use of its money [interest]? Yes. The bank charged Rs20, 000 in return for A’s use of its Rs 100,000 to buy a car.

The fact that no penalties are assessed if A is delinquent on his payments simply means that the amount of interest in the murabaha contract is fixed at Rs20, 000. This amounts to a Ḥiyal or legal “trick” to defeat the intent of shariah.

Views of Burhan Ali Shah, Asst. Prof. Dr., Quaid-e-Azam University and  Ghulam Shabbir Khan Niazi, Prof. Dr., University of Lahore on Murhabah.

The State Banks of Pakistan’s (SBP) efforts to promote Islamic banking in parallel with the conventional banking gave a new impetus to the growth of Islamic banking making Islamic banking available in almost every corner of the country. Nonetheless, the issue of it being Shari’ah complaint or otherwise is still controversial, as is of who can give the final verdict in the absence of an “ultimate authority” or “rules and guide lines”. The diversity of opinions and interpretations offered by various schools of thought “on Shari’ah issues makes things more complicated”, which sometimes lead to controversies about the acceptance or disapproval of a “product” offered by Islamic banks. Further, a group of Ulema declared that the prevailing Islamic banking was similar to conventional banking and contrary to the principles of Shari’ah, though certain other Ulema appreciated the concurrent Islamic banking practices. It is probably due to the lack of a “well developed Islamic banking theory”, i.e. giving a comprehensive picture of the “rationale, role, nature, and working”, etc., in totality that can be achieved by conducting imperative research. This situation creates significant room for fresh research which may explore the contemporary Islamic banking practices in the light of the primary requirements of Shari’ah.

Hence, the current research initially explores the issues in the contemporary implementation of Murabaha, on the basis of the model agreements applied by Islamic banks in Pakistan. Further this research brings to light the expert opinion of Shari’ah scholars regarding the issues identified in the contemporary implementation of Murabaha in the light of the Shari’ah requirements in order to verify them as real Shari’ah issues or clarify them as no issues related to Shari’ah. Precisely, this research intends to realize the following objectives. • To study the contemporary implementation of Murabaha by the Islamic banks in Pakistan and identify the Shari’ah issues in the contemporary implementation of Murabaha on the basis of the model agreements. • To explore the opinion of contemporary Shari’ah scholars regarding the issues identified in the contemporary implementation of Murabaha on the basis of the model agreements after their proper analysis.

As far as the issue of ‘definition’ of the contemporary Islamic modes of financing, is concerned, a difference of opinion has been observed, though an independent legal framework for Islamic banking was supported by the respondents. In case of Murabaha, there is no Shari’ah issue in appointing the customer as agent by the bank. However, it is considered the least preferred option, at least theoretically. Nevertheless, practically Islamic banks prefer to appoint the customer as agent in almost all Murabaha dealings. The filling and signing all the documents of Murabaha at the same time is a serious violation of Shari’ah requirements making the whole Murabaha transaction void and equivalent to interest based conventional lending. It is therefore declared a serious Shari’ah issue in the contemporary practices of Islamic modes of financing. It is equivalent to selling a commodity without assuming the ownership risk against the principles of Shari’ah creating another serious Shari’ah issue in the contemporary implementation of Murabaha by Islamic banks. Regarding the observation on selling of good to the customer without taking any post sale responsibilities by the bank, a unanimous opinion cannot be formulated. A difference of opinion was observed with respect to exemption from ‘khiyar e aib’. Thus, an explicit Shari’ah position cannot be defined with respect to the existence or otherwise of khiyar e aib in case of Murabaha transactions. The third party (supplier’s) risk is the responsibility of the bank and shifting such risk to the agent, on the basis of whatever plea is a practical Shari’ah issue in the contemporary practices of Murabaha. The agent is only responsible if he/she is found guilty of negligence or misconduct. Generally it is not the responsibility of the agent to refund the amount to the bank if already paid to the supplier and the supplier fails to deliver the goods in the requisite time. In principle, the third party (supplier) risk belongs to the principal (bank), not to the agent according to the principles of Shari’ah. Thus, the bank should bear such risk in case supplier fails to provide the desired goods in time.

Islamic banks are found operating under the same conventional legal framework including the Financial Institutions (Recovery of Finances) Ordinance 2001, and BCO, 1962, besides others, technically preventing the application of Islamic banking in its true spirit. Similarly, Islamic banks are observed shifting all types of risks to the customers either as agents or as ultimate consumers in the contemporary implementation of Muarbaha. Previous studies also pointed out that Islamic banks used to shift “all risks and liabilities to the customer” in a sale transaction in contravention to Shari’ah requirements. Appointing the loan seeker as agent to purchase the desired goods and for assurance of quality and safety essentially passing all risks associated with the Murabaha transaction to the loan seeker reflects the conventional behavior of Islamic banks. In fact, appointing the customer as agent is preferred by banks for being secure from bank’s point of view but such mechanism makes “Murabaha a back door to interest” and creates doubts on its Shari’ah acceptability. At times, all the documents are signed at the same time without creating any gap between the two transactions of buying and selling of goods by the bank. Hence, the bank assumes no risk of ownership or whatsoever, even for a short while. This in any case, does not appear to be in conformity with the requirements of Shari’ah . Likewise the third party (supplier) risk belongs to the principal (bank). Thus, the bank should bear such risk in case supplier fails to provide the desired goods in time. However, practically the Islamic banks shift all such risk to the agent/consumer. The bank absolves itself of all responsibilities including the khiyar e aib, in undertaking the Murabaha sale transaction on the pretext that the subject goods are purchased by the agent for his/her (the agent) use ultimately. Therefore, all the risks including the ownership risk are transferred to the agent (customer) even if he/she is working as agent for the bank. Thus, the bank does not accept any ownership or related risks, physical or constructive in any ways in Murabaha but only uses it as a heela working only as financial intermediary like conventional banks but with a different set of documents/agreements.

In order to establish true Islamic banking in the country, Islamic banks are required to work according to the Shari’ah principles in letter and spirit. For instance, in order to take a step forward to the true application of Murabaha, the banks need to avoid appointing the customers as agents any more. The bank should first purchase the requisite goods as per order of the customer and then should sell/deliver to the customer itself. The old fashioned argument that the bank does not have the requisite expertise in selecting and buying the desired goods is no more worth considering. Even the current form of Islamic banking is in existence for more than 15 years since 2002, whereas overall it is more than 50 years old since it came into being in 1963 in Mit Ghamr . However, the government needs to amend the relevant sections of the Banking Companies Ordinance 1962, which prevents Islamic banks from undertaking actual trading.

The Islamic banks can establish a partnership arrangement with the manufacturer/supplier of some of the goods/commodities commonly used by the banks’ customers. The banks can easily work out such goods/commodities from their historical records. This approach can be made more practical if the Islamic banks choose a specific industry as an area of specialization for their operations, i.e. each Islamic bank may focus on a specific industry and develop the relevant expertise in that industry. Siddiqui (2001) also suggested creating an independent “merchant banking division” by Islamic banks for undertaking real time buying and selling of goods. Islamic banks may also form special purpose entities (SPE) staffed with personnel having relevant education and skills to carry out real time “trading and leasing” transactions. On the other hand Ahmed (2005) proposed independent financial institutions with expertise in Murabaha to purchase and possess goods and have “separate trading and financing activities” as an important remedy to eliminate “the current malpractices”. Islamic banking is primarily based on trading modes whether it is Murabaha, Salam, Istisna or even Ijara against the fundamental nature of banking, which only deals in money or documents. Therefore, the structure of Islamic banks needs to be drastically changed. They must work on the basis of fundamental principles of trading. For this purpose, the relevant statutes including BCO, 1962, Financial Institutions Recovery of Finance Ordinance, 2001, and others need to be properly amended allowing the Islamic banks to deal in trading of commodities/goods.

In order to address the issue of expertise, the Islamic banks would need to hire specialists in the respective areas including procurement, supply chain, marketing, sales, and of course finance and banking. It means the Islamic banks need to work like conglomerates, which is not a hypothetical (unreal) model. All the big corporate organizations already work in a similar way with many unrelated businesses in one group. It is worthwhile to mention that the analysis in this study is based on and limited to the information available in the SBP model agreements and principal documents/agreements collected from the two Islamic banks, which may limit the scope of the findings of this research up to some extent. Documents from more banks providing a wider content might have resulted in a larger pool of information making a more generalized analysis possible. Further, there are certain other areas in the field of Islamic banking which are still unexplored. The SBP formulates the monetary policy on the basis of an interest based system but also works as a regulator for Islamic banks. Therefore, future researches may focus on exploring the practical aspects of the monetary system currently in vogue and compare them with the Shari’ah requirements. Such investigations may also extend their scope to examine the money market operations of Islamic banks in the light of the teachings of Islam.



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