Turkey: Mostly Used Islamic Finance Instrument: Murabaha

Last Updated: 23 November 2015
Article by Serap Zuvin and Mehmet Ali Akgun

The term "Islamic finance" refers to the financing system that follows Shariah. Compliance with Shariah is different from the traditional debt-financing systems that exist in the Western banking system. According to the Shariah rules, business transactions cannot involve Riba (excess or increase, interest), Gharar (uncertainty), Maisir (speculation), and Qimar (gambling). While Quran prohibits application of Riba it does not mean that Shariah prohibits making profit. It scrutinizes the basis on which the profit is made, with the rationale that charging interest is harmful for the borrower while financiers would enjoy profits without spending any efforts of their own. These barriers led Islamic institutions and scholars to establish Shariah compliant finance techniques.1 Among of all Islamic financing options, Murabaha is the most commonly used one. Today, 90% of Islamic banking transactions are done using Murabaha.2

The root of the word "Murabaha" comes from Arabic language, meaning "sale". In today's world, Murabaha has become the most popular financing technique amongst "Islamic" banks. It is that 90 percent of financial operations are made by using this technique. Then the question arises: If murabaha only means "sale" in Arabic, what makes it this much popular as a financing method? Islamic banks, using Murabaha, provide their customers with financing by buying goods that their customers need, and then selling in return to their customers on a deferred payments basis. Therefore, it is being defined as "cost + financing".

The following example sets clear understanding on how Murabaha works;

Buyer A approaches Bank B to finance his purchase of a flat having a price of $100,000 from a third party seller C who only accepts cash payment. Bank B purchases the house from the seller for $100,000 and then sells it to Buyer A for $110,000 which is to be paid by A in instalments over the next one year.

In a conventional Western banking system, the client who is in need of the price of the asset he wishes to purchase usually applies to the bank for borrowing such amount and pays the interest to the bank in return for the loan he receives.  This method is against the Shariah. In the foregoing example, if Buyer A is delinquent on payments, then the amount that he/she owes is fixed and does not increase by interest being added up on the same. Therefore it can be concluded that Murabaha is actually just a sale transaction, where the bank buys an asset for a value on the demand of a third party and sells it for an increased price. Therefore, following conditions of sale apply to Murabaha if one wishes to analyse its compliance with Shariah.

  1. The subject of sale must exist at the time of sale.
  2. The seller must be the owner of the subject at the time of the second sale.
  3. The subject of sale must be in physical or constructive possession of the seller.
  4. The sale must have to be agreed and finalised on that place and time.
  5. The subject of sale must have a value.
  6. The subject of sale must be used for a Halal3 purpose.
  7. The subject of sale must specifically be identified and known to the buyer.
  8. Delivery of the sold subject to the buyer must be certain and not depend on a probability or an unforeseen event.
  9. The price must be definite for the validity of a sale.
  10. The sale must be unconditional. A conditional sale is invalid, unless the condition is recognized as a part of the transaction due to the commercial usage purposes.4

Even if there are some discussions about the compliance to the Shariah while having Murabaha transactions since the nature of Murabaha requires the Islamic bank to add some amount to the cost and this amount may be equivalent to interest rates of that date, Murabaha is still the most common Islamic financing technique. Leaving the theoretical discussions to scholars, it would be fair to say that in terms of efficiency, Murabaha is a simple and efficient financing tool for the people who do not utilize western banking tools simply because interest is Haram.

Footnotes

[1] Zuvin S.,  Akgun M., Toprak U. "Islamic Financial Leasing (Sukuk Al-Ijarah) Implementations In Aircraft Financing". available on www.mondaq.com

[2] http://unctad.org/en/Docs/ditccom20066_en.pdf

[3] The opposite of Haram. Permissible.

[4] Prof. Akgunduz A. Studies in Islamic Economics. p.16

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Serap Zuvin
Mehmet Ali Akgun
 
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