MURABAH TO PURCHASE ORDERER 1

ContentsINTRODUCTION..................................................4

SOME BASIC RULES OF SALE......................................5BAI' MU'AJJAL (SALE ON DEFERRED PAYMENT BASIS)................7

MURABAHAH RULES...............................................8MURABAHAH AS A MODE OF FINANCING..............................9

2MURABAHAH TO PURCHASE ORDERER

BASIC FEATURES OF MURABAHAH FINANCING........................9SOME ISSUES INVOLVED IN MURABAHAH............................11

DIFFERENT PRICING FOR CASH AND CREDIT SALES.................12THE USE OF INTEREST-RATE AS BENCHMARK.......................15

PROMISE TO PURCHASE........................................16SECURITIES AGAINST MURABAHAH PRICE..........................19

GUARANTEEING THE MURABAHAH..................................20PENALTY OF DEFAULT.........................................21

NO ROLL OVER IN MURABAHAH...................................25REBATE ON EARLIER PAYMENT...................................26

CALCULATION OF COST IN MURABAHAH............................27SUBJECT MATTER OF MURABAHAH.................................28

RESCHEDULING OF PAYMENTS IN MURABAHAH.......................28SECURITIZATION OF MURABAHAH.................................29

SOME BASIC MISTAKES IN MURABAHAH FINANCING...................29Conclusions..................................................31

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CHAPTER: 1

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MURABAHAH TO PURCHASE ORDERER

INTRODUCTION:Most of the Islamic banks and financial institutions

are using Murabahah as an Islamic mode of financing, andmost of their financing operations are based onMurabahah. That is why this term has been taken in theeconomic circles today as a method of banking operations,while the original concept of Murabahah is different fromthis assumption.

"Murabahah” is, in fact, a term of Islamic Fiqh and itrefers to a particular kind of sale having nothing to dowith financing in its original sense. If a seller agreeswith his purchaser to provide him a specific commodity ona certain profit added to his cost, it is called aMurabahah transaction. The basic ingredient of Murabahahis that the seller discloses the actual cost he hasincurred in acquiring the Commodity, and then adds someprofit thereon. This profit may be in lump sum or may bebased on a percentage.

The payment in the case of Murabahah may be at spot,and may be on a subsequent date agreed upon by theparties. Therefore, Murabahah does not necessarily implythe concept of deferred payment, as generally believed bysome people who are not acquainted with the Islamicjurisprudence and who have heard about Murabahah only inrelation with the banking transactions.

Murabahah, in its original Islamic connotation, issimply a sale. The only feature distinguishing it fromother kinds of sale is that the seller in Murabahahexpressly tells the purchaser how much cost he hasincurred and how much profit he is going to charge in

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addition to the cost. If a person sells a commodity for alump sum price without any reference to the cost, this isnot a Murabahah, even though he is earning some profit onhis cost because the sale is not based on a "cost-plus"concept. In this case, the sale is called "Musawamah."

This is the actual sense of the term "Murabahah” whichis a sale, pure and simple. However, this kind of sale isbeing used by the Islamic banks and financialinstitutions by adding some other concepts to it as amode of financing. But the validity of such transactionsdepends on some conditions which should be duly observedto make them acceptable in Shari'ah.

In order to understand these conditions correctly, oneshould, in the first instance, appreciate that Murabahahis a sale with all its implications, and that all thebasic ingredients of a valid sale should be present inMurabahah also. Therefore, this discussion will startwith some fundamental rules of sale without which a salecannot be held as valid in Shari'ah. Then, we shalldiscuss some special rules governing the sale ofMurabahah in particular, and in the end the correctprocedure for using the Murabahah as an acceptable modeof financing will be explained.

An attempt has been made to reduce the detailedprinciples into concise notes in the shortest possiblesentences, so that the basic points of the subject may begrasped at in one glance, and may be preserved for easyreference.

SOME BASIC RULES OF SALE:

'Sale' is defined in Shari'ah as 'the exchange of athing of value by another thing of value with mutualconsent'. Islamic jurisprudence has laid down enormousrules governing the contract of sale, and the Muslimjurists have written a large number of books, in anumber of volumes, to elaborate them in detail. What is

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meant here is to give a summary of only those ruleswhich are more relevant to the transactions of Murabahahas carried out by the financial institutions:

Rule 1. The subject matter of sale contract must beexisting at the time of sale contract. Thus, a thingwhich has not yet come into existence cannot be sold. Ifa non-existent thing has been sold, though by mutualconsent, the sale is void according to Shari'ah.

Example: A sells the unborn calf of his cow to B. Thesale is void.

Rule 2. The subject of sale must be in the ownership ofthe seller at the time of sale. Thus, what is not ownedby the seller cannot be sold. If he sells somethingbefore acquiring its ownership, the sale is void.

Example: A sells to B a car which is presently ownedby C, but A is hopeful that he will buy it from C andshall deliver it to B subsequently. The sale is void,because the car was not owned by A at the time ofsale.

Rule 3. The subject of sale must be in the physical orconstructive possession of the seller when he sells itto another person. "Constructive possession" means asituation where the possessor has not taken the physicaldelivery of the commodity, yet the commodity has comeinto his control, and all the rights and liabilities ofthe commodity are passed on to him, including the riskof its destruction.

Examples:(I) A has purchased a car from B. B has not yetdelivered it to A or to his agent. A cannot sell thecar to C. If he sells it before taking its deliveryfrom B, the sale is void.

(ii) A has purchased a car from B. B, afteridentifying the Car has placed it in a garage to whichA has free access and B has allowed him to take thedelivery from that place whenever he wishes. Thus therisk of the Car has passed on to A. The car is in theconstructive possession of A. If A sells the car to C

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without acquiring physical possession, the sale isvalid.

Explanation 1:The gist of the rules mentioned in paragraphs 1 to 3

is that a person cannot sell a commodity unless:(a) It has come into existence.(b) It is owned by the seller.(c) It is in the physical or constructivepossession of the seller.

Explanation 2:There is a big difference between an actual sale and

a mere promise to sell. The actual sale cannot beeffected unless the above three conditions arefulfilled. However one can promise to sell somethingwhich is not yet owned or possessed by him. Thispromise initially creates only a moral obligation onthe promisor to fulfill his promise, which is normallynot justifiable.Nevertheless, in certain situations, especially wheresuch promise has burdened the promise with someliability, it can be enforceable through the courts oflaw. In such cases the court may force the promisor tofulfill his promise, i.e. to effect the sale, and ifhe fails to do so, the court may order him to pay thepromise the actual damages he has incurred due to thedefault of the promisor.1

But the actual sale will have to be effected after theCommodity comes into the possession of the seller.This will require separate offer and acceptance, andunless the sale is effected in this manner, the legalconsequences of the sale shall not follow.

Exception:The rules mentioned in paragraphs 1 to 3 are relaxedwith respect to two types of sale, namely:(a) Bai' Salam(b) Istisna'

Rule 4. The sale must be instant and absolute. Thus asale attributed to a future date or a sale contingent ona future event is void. If the parties wish to effect a1 Resolution no. 2, 3 of the Fifth Session of the Islamic Fiqh Academy held in Kuwait in the year 1409 AH. See 2:1599.

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valid sale, they will have to effect it afresh when thefuture date comes or the contingency actually occurs.

Examples:(A) A says to B on the first of January: "I sell mycar to you on the first of February". The sale isvoid, because it is attributed to a future date.(b) A says to B, "If party X wins the elections, mycar stands sold to you". The sale is void, because itis contingent on a future event.

Rule 5. The subject of sale must be a property of value.Thus, a thing having no value according to the usage oftrade cannot be sold or purchased.

Rule 6. The subject of sale should not be a thing whichis not used except for a Haram purpose, like pork, wineetc.

Rule 7. The subject of sale must be specifically knownand identified to the buyer.

Explanation:The subject of sale may be identified either by pointor by detailed specification which can distinguish itfrom other things not sold.

Example:There is a building comprising a number of apartmentsbuilt in the same pattern. A, the owner of thebuilding says to B, "I sell one of these apartments toyou"; B accepts. The sale is void unless the apartmentintended to be sold is specifically identified orpointed out to the buyer.

Rule 8. The delivery of the sold commodity to the buyermust be certain and should not depend on a contingencyor chance.

Example: A sells his car stolen by some anonymousperson and the buyer purchases it under the hope thathe will manage to take it back. The sale is void.

Rule 9. The certainty of price is a necessary conditionfor the validity of a sale. If the price is uncertain,the sale is void.

Example: A says to B, "If you pay within a month, the

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price is Rs. 50. But if you pay after two months, theprice is Rs. 55". B agrees. The price is uncertain andthe sale is void, unless anyone of the twoalternatives is agreed upon by the parties at the timeof sale.

Rule 10. The sale must be unconditional. A conditionalsale is invalid, unless the condition is recognized as apart of the transaction according to the usage of trade.

Examples:(1) A buys a car from B with a condition that B willemploy his son in his firm. The sale is conditional,hence invalid.(2) A buys a refrigerator from B, with a conditionthat B undertakes its free service for 2 years. Thecondition, being recognized as a part of thetransaction, is valid and the sale is lawful.

BAI' MU'AJJAL (SALE ON DEFERRED PAYMENT BASIS):

1. A sale in which the parties agree that the paymentof price shall be deferred is called a "Bai' Mu'ajjat".

2. Bai' Mu'ajjal is valid if the due date of paymentis fixed in an unambiguous manner.

3. The due time of payment can be fixed either withreference to a particular date, or by specifying aperiod, like three months, but it cannot be fixedwith reference to a future event the exact date ofwhich is unknown or is uncertain. If the time ofpayment is unknown or uncertain, the sale is void.

4. If a particular period is fixed for payment, likeone month, it will be deemed to commence from thetime of delivery, unless the parties have agreedotherwise.

5. The deferred price may be more than the cash price,but it must be fixed at the time of sale.

6. Once the price is fixed, it cannot be decreased in

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case of earlier payment, nor can it be increased incase of default.

7. In order to pressurize the buyer to pay theinstallments promptly, the buyer may be asked topromise that in case of default, he will donate somespecified amount for a charitable purpose. In thiscase the seller may receive such amount from thebuyer, not to make it a part of his income, but touse it for a charitable purpose on behalf of thebuyer.

8. If the commodity is sold on installments, theseller may put a condition on the buyer that if hefails to pay any installment on its Due date, theremaining installments will become due immediately.

9. In order to secure the payment of price, the sellermay ask the buyer to furnish a security whether inthe form of a mortgage or in the form of a lien or acharge on any of his existing assets.

10. The buyer can also be asked to sign a promissorynote or a bill of exchange, but the note or the billcannot be sold to a third party at a price differentfrom its face value.

MURABAHAH RULES:

1. Murabahah is a particular kind of sale where theseller expressly mentions the cost of the soldcommodity he has incurred, and sells it to anotherperson by adding some profit or mark-up thereon.

2. The profit in Murabahah can be determined by mutualconsent, either in lump sum or through an agreedratio of profit to be charged over the cost.

3. All the expenses incurred by the seller inacquiring the commodity like freight, custom dutyetc. Shall be included in the cost price and themark-up can be applied on the aggregate cost.However, recurring expenses of the business likesalaries of the staff, the rent of the premises etc.

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cannot be included in the cost of an individualtransaction. In fact, the profit claimed over thecost takes care of these expenses.

4. Murabahah is valid only where the exact cost of acommodity can be ascertained. If the exact costcannot be ascertained, the commodity cannot be soldon Murabahah basis. In this case the commodity mustbe sold on Musawamah (bargaining) basis i.e. withoutany reference to the cost or to the ratio ofprofit / mark-up. The price of the commodity in suchcases shall be determined in lump sum by mutualconsent.

Example (1) A purchased a pair of shoes for Rs.100/-. He wants to sell it on Murabahah with 10%mark-up. The exact cost is known. The Murabahah saleis valid.Example (2) A purchased a ready - made suit with apair of shoes in a single transaction, for a lump sumprice of Rs. 500/-. A can sell the suit includingshoes on Murabahah. But he cannot sell the shoesseparately on Murabahah, because the individual costof the shoes is unknown. If he wants to sell theshoes separately, he must sell it at a lump sum pricewithout reference to the cost or to the mark-up.

MURABAHAH AS A MODE OF FINANCING:

Originally, Murabahah is a particular type of sale andnot a mode of financing. The ideal mode of financingaccording to Shari'ah is Mudarabah or Musharakah whichhave been discussed in the first chapter. However, inthe perspective of the current economic set up, thereare certain practical difficulties in using Mudarabahand Musharakah instruments in some areas of financing.Therefore, the contemporary Shari’ah experts haveallowed, subject to certain conditions, the use of theMurabahah on deferred payment basis as a mode offinancing. But there are two essential points which mustbe fully understood in this respect:

1. It should never be overlooked that, originally,Murabahah is not a mode of financing. It is only adevice to escape from "interest" and not an idealinstrument for carrying out the real economic objectives

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of Islam. Therefore, this instrument should be used as atransitory step taken in the process of the Islamizationof the economy, and its use should be restricted only tothose cases where Mudarabah or Musharakah are notpracticable.

2. The second important point is that the Murabahahtransaction does not come into existence by merelyreplacing the word of "interest" by the words of"profit" or "mark-up". Actually, Murabahah as a mode offinance has been allowed by the Shari'ah scholars withsome conditions. Unless these conditions are fullyobserved, Murabahah is not permissible. In fact, it isthe observance of these conditions which can draw aclear line of distinction between an interest-bearingloan and a transaction of Murabahah. If these conditionsare neglected, the transaction becomes invalid accordingto Shari'ah.

BASIC FEATURES OF MURABAHAH FINANCING:

1. Murabahah is not a loan given on interest. It is thesale of a commodity for a deferred price which includesan agreed profit added to the cost.

2. Being a sale, and not a loan, the Murabahah shouldfulfill all the conditions necessary for a valid sale,especially those enumerated earlier in this chapter.

3. Murabahah cannot be used as a mode of financing exceptwhere the client needs funds to actually purchase somecommodities. For example, if he wants funds to purchasecotton as a raw material for his ginning factory, theBank can sell him the cotton on the basis of Murabahah.But where the funds are required for some otherpurposes, like paying the price of commodities alreadypurchased by him, or the bills of electricity or otherutilities or for paying the salaries of his staff,Murabahah cannot be effected, because Murabahah requiresa real sale of some commodities, and not merelyadvancing a loan.

4. The financier must have owned the commodity before hesells it to his client.

5. The commodity must come into the possession of thefinancier, whether physical or constructive, in thesense that the commodity must be in his risk, though fora short period.

6. The best way for Murabahah , according to Shari'ah, isthat the financier himself purchases the commodity andkeeps it in his Own possession, or purchases the

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commodity through a third person appointed by him asagent, before he sells it to the customer. However, inexceptional cases, where direct purchase from thesupplier is not practicable for some reason, it is alsoallowed that he makes the customer himself his agent tobuy the commodity on his behalf. In this case the clientfirst purchases the commodity on behalf of his financierand takes its possession as such. Thereafter, hepurchases the commodity from the financier for adeferred price. His possession over the commodity in thefirst instance is in the capacity of an agent of hisfinancier. In this capacity he is only a trustee, whilethe ownership vests in the financier and the risk of thecommodity is also borne by him as a logical consequenceof the ownership. But when the client purchases thecommodity from his financier, the ownership, as well asthe risk, is transferred to the client.

7. As mentioned earlier, the sale cannot take place unlessthe commodity comes into the possession of the seller,but the seller can promise to sell even when thecommodity is not in his possession. The same rule isapplicable to Murabahah .

8. In the light of the aforementioned principles, afinancial institution can use the Murabahah as a mode offinance by adopting the following procedure:

Firstly: The client and the institution sign an over-all agreement whereby the institution promises tosell and the client promises to buy the commoditiesfrom time to time on an agreed ratio of profit addedto the cost. This agreement may specify the limit upto which the facility may be availed.Secondly: When a specific commodity is required bythe customer, the institution appoints the client ashis agent for purchasing the commodity on its behalf,and an agreement of agency is signed by both theparties.Thirdly: The client purchases the commodity on behalfof the institution and takes its possession as anagent of the institution.Fourthly: The client informs the institution that hehas purchased the commodity on his behalf, and at thesame time, makes an offer to purchase it from theinstitution.Fifthly: The institution accepts the offer and thesale are concluded whereby the ownership as well asthe risk of the commodity is transferred to theclient.

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All these five stages are necessary to effect a validMurabahah. If the institution purchases the commoditydirectly from the supplier (which is preferable) itdoes not need any agency agreement. In this case, thesecond phase will be dropped and at the third stagethe institution itself will purchase the commodityfrom the supplier, and the fourth phase will berestricted to making an offer by the client.The most essential element of the transaction is thatthe commodity must remain in the risk of theinstitution during the period between the third andthe fifth stage. This is the only feature of Murabahahwhich can distinguish it from an interest-basedtransaction. Therefore, it must be observed with duediligence at all costs, otherwise the Murabahahtransaction becomes invalid according to Shari'ah.

9. It is also a necessary condition for the validity ofMurabahah that the commodity is purchased from a thirdparty. The purchase of the commodity from the clienthimself on 'buy back' agreement is not allowed inShari'ah. Thus Murabahah based on 'buy back' agreementis nothing more than an interest based transaction.

10. The above mentioned procedure of the Murabahahfinancing is a complex transaction where the partiesinvolved have different capacities at differentstages.(a) At the first stage, the institution and theclient promise to sell and purchase a commodity infuture. This is not an actual sale. It is just apromise to effect a sale in future on Murabahah basis.Thus at this stage the relation between theinstitution and the client is that of a promisor and apromise.(b) At the second stage, the relation between theparties is that of a principal and an agent.(c) At the third stage, the relation between theinstitution and the supplier is that of a buyer andseller.(d) At the fourth and fifth stage, the relation ofbuyer and seller comes into operation between theinstitution and the client, and since the sale iseffected on deferred payment basis, the relation of adebtor and creditor also emerges between themsimultaneously.All these capacities must be kept in mind and mustcome into operation with all their consequentialeffects, each at its relevant stage, and thesedifferent capacities should never be mixed up orconfused with each other.

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11. The institution may ask the client to furnish asecurity to its satisfaction for the prompt payment ofthe deferred price. He may also ask him to sign apromissory note or a bill of exchange, but it must beafter the actual sale takes place, i.e. at the fifthstage mentioned above. The reason is that thepromissory note is signed by a debtor in favour of hiscreditor, but the relation of debtor and creditorbetween the institution and the client begins only atthe fifth stage, whereupon the actual sale takes placebetween them.

12. In the case of default by the buyer in the paymentof price at the due date, the price cannot beincreased. However, if he has undertaken, in theagreement to pay an amount for a charitable purpose,as mentioned in para 7 of the rules of Bai' Mu'ajjal,he shall be liable to pay the amount undertaken byhim. But the amount so recovered from the buyer shallnot form part of the income of the seller I thefinancier. He is bound to spend it for a charitablepurpose on behalf of the buyer, as will be explainedlater in detail.

SOME ISSUES INVOLVED IN MURABAHAH: So far the basic concept of Murabahah has beenexplained. Now, it is proposed to discuss some relevantissues with reference to the underlying Islamicprinciples and their practical applicability inMurabahah transaction, because without correctunderstanding of these issues, the concept may remainambiguous and its practical application may besusceptible to errors and misconceptions.

DIFFERENT PRICING FOR CASH AND CREDIT SALES:

The first and foremost question about Murabahah is that,when used as a mode of financing, it is always effectedon the basis of deferred payment. The financierpurchases the commodity on cash payment and sells it tothe client on credit. While selling the commodity oncredit, he takes into account the period in which theprice is to be paid by the client and increases theprice accordingly. The longer the maturity of the

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Murabahah payment, the higher the price. Therefore theprice in a Murabahah transaction, as practiced by theIslamic banks, is always higher than the market price.If the client is able to purchase the same commodityfrom the market on cash payment, he will have to paymuch less than he has to pay in a Murabahah transactionon deferred payment basis. The question arises as towhether the price of a commodity in a credit sale may beincreased from the price of a cash sale. Some peopleargue that the increase of price in a credit sale, beingin consideration of the time given to the purchaser,should be treated analogous to the interest charged on aloan, because in both cases an additional amount ischarged for the deferment of payment. On this basis theyargue that the Murabahah transactions, as practiced inthe Islamic banks, are not different in essence from theinterest-based loans advanced by the conventional banks.

This argument, which seems to be logical inappearance, is based on a misunderstanding about theprinciples of Shari'ah regarding the prohibition ofRiba. For the correct comprehension of the concept thefollowing points must be kept in view.

The modern capitalist theory does not differentiatebetween money and commodity in so far as commercialtransactions are concerned. In the matter of exchange,money and commodity both are treated at par. Both can betraded in. Both can be sold at whatever price theparties agree upon. One can sell one dollar for twodollars on the spot as well as on credit, just as he cansell a commodity valuing one dollar for two dollars. Theonly condition is that it should be with mutual consent.

The Islamic principles, however, do not subscribe tothis theory. According to Islamic principles, money andcommodity have different characteristics and therefore,they are treated differently. The basic points ofdifference between money and commodity are thefollowing:(a) Money has no intrinsic utility. It cannot beutilized for fulfilling human needs directly. It canonly be used for acquiring some goods or services. Thecommodities, on the other hand, have intrinsic utility.They can be utilized directly without exchanging themfor some other thing.(b) The commodities can be of different qualities, whilemoney has no quality except that it is a measure of valueor a medium of exchange. Therefore, all the units ofmoney, of same denomination, are 100% equal to each

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other. An old and dirty note of Rs. 1000/- has the samevalue as a brand new note of Rs. 1000/-, unlike thecommodities which may have different qualities, andobviously an old and used car may be much less in valuethan a brand new car.(c) In commodities, the transaction of sale and purchaseis effected on a particular individual commodity or, atleast, on the commodities having particularspecifications. If A has purchased a particular car bypin-pointing it and seller has agreed, he deserves toreceive the same car. The seller cannot compel him totake the delivery of another car, though of the same typeor quality. This can only be done if the purchaser agreesto it which implies that the earlier transaction iscancelled and a new transaction on the new car iseffected by mutual consent.

Money, on the contrary, cannot be pin-pointed in atransaction of exchange. If A has purchased a commodityfrom B by showing him a particular note of Rs. 1000/- hecan still pay him another note of the same denomination,while B cannot insist that he will take the same note aswas shown to him.

Keeping these differences in view, Islam has treatedmoney and commodities differently. Since money has nointrinsic utility, but is only a medium of exchangewhich has no different qualities, the exchange of a unitof money for another unit of the same denominationcannot be effected except at par value. If a currencynote of Rs. 1000/- is exchanged for another note ofPakistani Rupees, it must be of the value of Rs. 1000/-The price of the former note can neither be increasednor decreased from Rs. 1000/- even in a spottransaction, because the currency note has no intrinsicutility nor a different quality (recognized legally),therefore any excess on either side is withoutconsideration, hence not allowed in Shari'ah. As this istrue in a spot exchange transaction, it is also true ina credit transaction where there is money on both sides,because if some excess is claimed in a credittransaction (where money is exchanged for money) it willbe against nothing but time.

The case of the normal commodities is different.Since they have intrinsic utility and have differentqualities, the owner is at liberty to sell them atwhatever price he wants, subject to the forces of supplyand demand. If the seller does not commit a fraud ormisrepresentation, he can sell a commodity at a pricehigher than the market rate with the consent of thepurchaser. If the purchaser accepts to buy it at thatincreased price, the excess charged from him is quite

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permissible for the seller. When he can sell hiscommodity at a higher price in a cash transaction, hecan also charge a higher price in a credit sale, subjectonly to the condition that he neither deceives thepurchaser, nor compels him to purchase, and the buyeragrees to pay the price with his free will.

It is sometimes argued that the increase of price ina cash transaction is not based on the deferred payment;therefore it is permissible while in a sale based ondeferred payment, the increase is purely against timewhich makes it analogous to interest. This argument isagain based on the misconception that whenever price isincreased taking the time of payment into consideration,the transaction comes within the ambit of interest. Thispresumption is not correct. Any excess amount chargedagainst late payment is Riba only where the subjectmatter is money on both sides. But if a commodity issold in exchange of money, the seller, when fixing theprice, may take into consideration different factors,including the time of payment. A seller, being the ownerof a commodity which has intrinsic utility may charge ahigher price and the purchaser may agree to pay it dueto various reasons, for example:

(a) His shop is nearer to the buyer who does notwant to go to the market which is not so near.

(b) The seller is more trust-worthy for thepurchaser than others, and the purchaser hasmore confidence in him that he will give him therequired thing without any defect.

(c) The seller gives him priority in sellingcommodities having more demand.

(d) The atmosphere of the shop of the seller iscleaner and more comfortable than other shops,

(e) The seller is more courteous in hisdealings than others.

These and similar other considerations play theirrole in charging a higher price from the customer. Inthe same way, if a seller increases the price because heallows credit to his client, it is not prohibited byShari'ah if there is no cheating and the purchaseraccepts it with open eyes, because whatever the reasonof increase, the whole price is against a commodity andnot against money. It is true that, while increasing theprice of the commodity, the seller has kept in view thetime of its payment, but once the price is fixed, itrelates to the commodity, and not to the time. That is

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why if the purchaser fails to pay at the stipulatedtime, the price will remain the same and can never beincreased by the seller. Had it been against time, itmight have been increased, if the seller allows him moretime after the maturity.

To put it another way, since money can only be tradedin at par value, as explained earlier, any excessclaimed in a credit transaction (of money in exchange ofmoney) is against nothing but time. That is why if thedebtor is allowed more time at maturity, some more moneyis claimed from him. Conversely, in a credit sale of acommodity, time is not the exclusive consideration whilefixing the price. The price is fixed for commodity, notfor time. However, time may act as an ancillary factorto determine the price of the commodity, like any otherfactor from those mentioned above, but once this factorhas played its role, every part of the price isattributed to the commodity.

The upshot of this discussion is that when money isexchanged for money, no excess is allowed. Neither incash transaction, nor in credit, but where a commodityis sold for money, the price agreed upon by the partiesmay be higher than the market price, both in cash andcredit transactions. Time of payment may act as anancillary factor to determine the price of a commodity,but it cannot act as an exclusive basis for and the soleconsideration of an excess claimed in exchange of moneyfor money.

This position is accepted unanimously by all the fourschools of Islamic law and the majority of the Muslimjurists. They say that if a seller determines twodifferent prices for cash and credit sales, the price ofthe credit sale being higher than the cash price, it isallowed in Shari'ah. The only condition is that at thetime of actual sale, one of the two options must bedetermined, leaving no ambiguity in the nature of thetransaction. For example, it is allowed for the seller,at the time of bargaining, to say to purchaser, "If youpurchase the commodity on cash payment, the price wouldbe Rs. 100/- and if you purchase it on a credit of sixmonths, the price would be Rs.110/-." But the purchasershall have to select either of the two options. He

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should say that he would purchase it on credit for Rs.110/-. Thus, at the time of actual sale, the price willbe known to both parties.2

However, if either of the two options is notdetermined in specific terms, the sale will not bevalid. This may happen in those installment sales inwhich different prices are claimed for differentmaturities. In this case the seller draws a schedule ofprices according to schedule of payment. For example,Rs. 1000/- are charged for the credit of 3 months Rs.1100/- for the credit of 6 months, Rs. 1200/- for 9month and so on. The purchaser takes the commoditywithout specifying the option he will exercise, on theassumption that he will pay the price in futureaccording to his convenience. This transaction is notvalid, because the time of payment, as well as theprice, is not determined. But if he chooses one of theseoptions specifically and says, for example, that hepurchases the commodity on 6 months credit with a priceof 1100/- the sale will be valid.

Another point must be noted here. What has beenallowed above is that the price of the commodity in acredit sale is fixed at more than the cash price. But ifthe sale has taken place at cash price, and the sellerhas imposed a condition that in case of late payment, hewill charge 10% per annum as a penalty or as interest,this is totally prohibited; because what is beingcharged is not a part of the price; it is an interestcharged on a debt.

The practical difference between the two situationsis that where the additional amount is a part of theprice, it may be charged on a one time basis only. Ifthe purchaser fails to pay it on time, the seller cannotcharge another additional amount. The price will remainthe same without any addition. Conversely, where theadditional amount is not a part of the price it willkeep increasing with the period of default.

THE USE OF INTEREST-RATE AS BENCHMARK:

Many institutions financing by way of Murabahahdetermine their profit or mark-up on the basis of the

2 See Ibn Qudamah, al-Mughni, 4:290; al-Sarakhsi, al-Mabsut, 13:8; al-Dasuqi, 3:58; and Mughni al-Muhtaj, 2:31.

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current interest rate, mostly using LIBOR (Inter-bankoffered rate in London) as the criterion. For example,if LIBOR is 6%, they determine their mark-up onMurabahah equal to LIBOR or some percentage above LIBOR.This practice is often criticized on the ground thatprofit based on a rate of interest should be asprohibited as interest itself.

No doubt, the use of the rate of interest fordetermining a Halal profit cannot be considereddesirable. It certainly makes the transaction resemblean interest-based financing, at least in appearance, andkeeping in view the severity of prohibition of interest,even this apparent resemblance should be avoided as fara possible. But one should not ignore the fact that themost important requirement for validity of Murabahah isthat it is a genuine sale with all its ingredients andnecessary consequences. If a Murabahah transactionfulfils all the conditions enumerated in this chapter,merely using the interest rate as a benchmark fordetermining the profit of Murabahah does not render thetransaction as invalid, Haram or prohibited, because thedeal itself does not contain interest. The rate ofinterest has been used only as an indicator or as abenchmark. In order to explain the point, let me give anexample.

A and B are two brothers. A Trades in liquor which istotally prohibited in Shari'ah. B, being a practicingMuslim dislikes the business of A and starts thebusiness of soft drinks, but he wants his business toearn as much profit as A earns through trading inliquor, therefore he resolves that he will charge thesame rate of profit from his customers as A charges overthe sale of liquor. Thus he has tied up his rate ofprofit with the rate used by A in his prohibitedbusiness. One may question the propriety of his approachin determining the rate of his profit, but obviously noone can say that the profit charged by him in his Halalbusiness is Haram, because he has used the rate ofprofit of the business of liquor as a benchmark.Similarly, so far as the transaction of Murabahah isbased on Islamic principles and fulfils all itsnecessary requirements, the rate of profit determined onthe basis of the rate of interest will not render thetransaction as Haram. It is, however true that theIslamic banks and financial institutions should get rid

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of this practice as soon as possible, because, firstly,it takes the rate of interest as an ideal for a Halalbusiness which is not desirable, and secondly because itdoes not advance the basic philosophy of Islamic economyhaving no impact on the system of distribution.Therefore, the Islamic banks and financial institutionsshould strive for developing their own benchmark. Thiscan be done by creating their own inter-bank marketbased on Islamic principles. The purpose can be achievedby creating a common pool which invests in asset-backedinstruments like Musharakah, Ijarah etc. If majority ofthe assets of the pool is in tangible form, like leasedproperty or equipment, shares in business concerns etc.its units can be sold and purchased on the basis oftheir net asset value determined on periodical basis.These units may be negotiable and may be used forovernight financing as well. The banks having surplusliquidity can purchase these units and when they needliquidity, they can sell them. This arrangement maycreate inter-bank market and the value of the units mayserve as an indicator for determining the profit inMurabahah and leasing also.

PROMISE TO PURCHASE:

Another important issue in Murabahah financing which hasbeen subject of debate between the contemporary Shari'ahScholars is that the bank/financier cannot enter into anactual sale at the time when the client seeks Murabahahfinancing from him, because the required commodity isnot owned by the bank at this stage and, as explainedearlier, one cannot sell a commodity not owned by him,nor can he effect a forward sale. He is, therefore,bound to purchase the commodity from the supplier, andthen he can sell it to the client after having itsphysical or constructive possession. On the other hand,if the client is not bound to purchase the commodityafter the financier has purchased it from the supplier,the financier may be confronted with a situation wherehe has incurred huge expenses to acquire the commodity,but the client refuses to purchase it. The commodity may

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be of such a nature that it has no common demand in themarket and is very difficult to dispose of. In this casethe financier may suffer unbearable loss.

Solution to this problem is sought in the Murabahaharrangement by asking the client to sign a promise topurchase the commodity when it is acquired by thefinancier. Instead of being a bilateral contract offorward sale, it is a unilateral promise from the clientwhich binds himself and not the financier. Being a one-sided promise, it is distinguishable from the bilateralforward contract. This solution is subjected to theobjection that a unilateral promise creates a moralobligation but it cannot be enforced, according toShari'ah, by the courts of law. This leads us to thequestion whether or not a one-sided promise isenforceable in Shari'ah. The general impression is thatit is not, but before accepting this impression at itsface value, we will have to examine it in the light ofthe original sources of Shari'ah.

A thorough study of the relevant material in thebooks of Islamic jurisprudence would show that thefuqaha' (the Muslim jurists) have different views on thesubject. Their views may be summarized as follows:

1. Many of them are of the opinion that 'fulfilling apromise' is a noble quality and it is advisable for thepromisor to observe it, and Its violation isreproachable, but it is neither mandatory (wajib), norenforceable through courts. This view is attributed toImam Abu Hanifah, Imam al-Shafi'i, Imam Ahmad and tosome Maliki jurists.3 However as will be shown later,many Hanafi and Maliki and some Shafi'i' jurists do notsubscribe to this view.

2. A number of the Muslim jurists are of the viewthat fulfilling a promise is mandatory and a promisor isunder moral as well as legal obligation to fulfil hispromise. According to them, promise can be enforcedthrough courts of law. This view is ascribed to Samurahibn Jundub • the well known companion of the HolyProphet (PBUH), Umar ibn Abd al-Aziz, Hasan al-Basri,Sa'id ibn al- Ashwa', Ishaq ibn Rahwaih and Imam al-Bukhari.4 The same is the view of some Maliki jurists,and it is preferred by Ibn al-'Arabi and Ibn al-Shat,and endorsed by al-Ghazzali, the famous Shafi'i jurist,

3 See Umdat al-Qari, 12:121; Mirqat al-Mafatih, 4:653; al-Adhkar al-Nawawi,282; Fat-h al-'Ali al-Malik, 1:254.4 See Sahih al-Bukhari, Kitab al-Shahadat, where this view is reported from the all the aforesaid jurists

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who says the promise is binding, if it is made inabsolute terms. The same is the view of Ibn Shubrumah.5

The third view is presented by some Maliki jurists. Theysay that in normal conditions, promise is not binding,but if the promisor has caused the promise to incur someexpenses or undertake some labor or liability on thebasis of promise, it is mandatory on him to fulfil hispromise for which he may be compelled by the courts.6

Some contemporary scholars have claimed that thejurists who have accepted the binding nature of apromise have done so only with regard to unilateralgifts or other voluntary payments, but none of them hasaccepted the binding nature of a promise to effect abilateral commercial or monetary transaction. However,based on a close study, this notion does not seem to becorrect, because the Maliki and Hanafi jurists haveallowed 'Bai' bit wafa' on the basis of binding promise.Bai' bil wafa' is a special kind of sale whereby thepurchaser of an immovable property undertakes thatwhenever the seller will give him the price back, hewill resell the house to him. The question of validityof 'Bai'bil wafa' has already been discussed in detailin the first chapter while explaining the concept ofhouse financing on the basis of 'diminishingMusharakah'. The gist of the discussion is that ifrepurchase by the seller is made a condition for theoriginal sale, it is not a valid transaction, but if theparties have entered into the original saleunconditionally, but the seller has signed a separateand independent promise to repurchase the sold property,this promise will be binding on the promisor andenforceable through the courts. The binding nature ofthe promise in this case has been admitted by bothMaliki and Hanafi jurists.7

Obviously, this promise does not relate to a gift. Itis a promise to effect a sale in future. Still, theMaliki and Hanafi jurists have accepted it as binding onthe promisor and enforceable through the courts. It is aclear proof of the fact that the jurists who hold thepromises to be binding do not restrict it to thepromises of gifts etc.The same principle is applicable, according to them, tothe promises whereby the promisor undertakes to enterinto a bilateral contract in future. In fact, the Holy5 Al-Qurtubi, Al-Jami' li-Ahkam al-Qur'an, 18:29; Hashiyah ibn al-Shat 'alaFuruq al-Qarafi, 4:24; Al-Ghazzali, Ihya Ulum al-Din, 3:133; Ibn Hazm, al- Muhalla, 8:28.

6 Al-Furuq al-Qarafi, 4:25; Fat-h al-'Ali al-Malik, 1:254.7 Al-Hattab, Tahrir al-Kalam (Beirut, 1404 AH), 239.

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Qur'an and the Sunnah of the Holy Prophet (PBUH) arevery particular about fulfilling promises. The HolyQur'an says:

And fulfill the covenant. Surely, the covenant willbe asked about (In the Hereafter) (Bani Isra'il: 34)

O those who believe, why do you say what younot do. It invites Allah's anger that you say whatyou not do. (Al-Saf: 2 to 3)

Imam Abu Bakr al-Jassas has said that this verse of theHoly Qur'an indicates that if one undertakes to dosomething, no matter whether it is worship or acontract, it is obligatory on him to do it.8

The Holy Prophet (PBUH) is reported to have said:There are three distinguishing features of a hypocrite: when hespeaks, tells a lie, when he promises, he backs out and when he isgiven something in trust, he breaches the trust.9

This is only an example. There are a large number ofinjunctions in the a Hadith of the Holy Prophet (PBUH)where it is ordained to fulfill the promises and it isclearly prohibited to back out, except for a validreason.

Therefore, it is evident from these injunctions thatfulfilling promise is obligatory. However, the questionwhether or not a promise is enforceable in courtsdepends on the nature of the promise. There arecertainly some sorts of promises which cannot beenforced through courts. For example, at the time ofengagement the parties promise to go through themarriage. These promises create a moral obligation, butobviously they cannot be enforced through courts of law.But in commercial dealings, where a party has given anabsolute promise to sell or purchase something and theother party has incurred liabilities on that basis,there is no reason why such a promise should not beenforced. Therefore, on the basis of the clearinjunctions of Islam, if the parties have agreed thatthis particular promise will be binding on the promisor,

8 Al-Jassas, Ahkam al-Qur'an, 3:420.9 Sahih al-Bukhari, Kitab al-Iman.

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it will be enforceable. This is not a questionpertaining to Murabahah alone. If promises are notenforceable in the commercial transactions, it mayseriously jeopardize commercial activities. If somebodyorders a trader to bring for him a certain commodity andpromises to purchase it from him, on the basis of whomthe trader imports it from abroad by incurring hugeexpenses, how can it be allowed for the former to refuseto purchase it? There is nothing in the Holy Qur'an orSunnah which prohibits the making of such promisesenforceable.

It is on these grounds that the Islamic Fiqh AcademyJeddah has made the promises in commercial dealingsbinding on the promisor with the following conditions,

(a) It should be one-sided promise.(b) The promise must have caused the promise to incur

some liabilities.(c) If the promise is to purchase something, the

actual sale must take place at the appointed time bythe exchange of offer and acceptance. Mere promiseitself should not be taken as the concluded sale.

(d) If the promisor backs out of his promise, thecourt may force him either to purchase the commodityor pay actual damages to the seller.10 The actualdamages will include the actual monetary losssuffered by him, but will not include theopportunity cost.

On this basis, it is allowed that the client promisesto the financier that he will purchase the commodityafter the latter acquires it from the supplier. Thispromise will be binding on him and may be enforcedthrough courts in the manner explained above. Thispromise does not amount to actual sale. It will besimply a promise and the actual sale will take placeafter the commodity is acquired by the financier forwhich exchange of offer and acceptance will benecessary.

SECURITIES AGAINST MURABAHAH PRICE:

10 Resolution no. 2 and 3, Fifth Conference of the Islamic Fiqh Academy held inKuwait, 1409 AH. See the academy's journal no. 5, 2:1599.

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Another issue regarding Murabahah financing is that theMurabahah price is payable at a later date. Theseller/financier naturally wants to make sure that theprice will be paid at the due date. For this purpose, hemay ask the client to furnish a security to hissatisfaction. The security may be in the form of amortgage or a hypothecation or some kind of lien orcharge. Some basic rules about this security must,therefore, be kept in mind.

1. The security can be claimed rightfully where thetransaction has created a liability or a debt. Nosecurity can be asked from a person who has not incurreda liability or debt. As explained earlier, the procedureof Murabahah financing comprises of differenttransactions carried out at different stages. In theearlier stages of the procedure, the client does notincur a debt. It is only after the commodity is sold tohim by the financier on credit that the relationship ofa creditor and debtor comes into existence. Therefore,the proper way in a transaction of Murabahah would bethat the financier asks for a security after he hasactually sold the commodity to the client and the pricehas become due on him, because at this stage the clientincurs a debt. However, it is also permissible that theclient furnishes a security at earlier stages, but afterthe Murabahah price is determined. In this case, if thesecurity is possessed by the financier, it will remainat his risk, meaning thereby that if it is destroyedbefore the actual sale to the client, he will haveeither to pay the market price of the mortgaged asset,and cancel the agreement of Murabahah, or sell thecommodity required by the client and deduct the marketprice of the mortgaged asset from the price of the soldproperty.

2. It is also permissible that the sold commodityitself is given to the seller as a security. Somescholars are of the opinion that this can only be doneafter the purchaser has taken its delivery and notbefore. It means that the purchaser shall take itsdelivery, either physical or constructive, from theseller, and then give it back to him as mortgage, sothat the transaction of mortgage is distinguished fromthe transaction of sale. However, after studying therelevant material, it can be concluded that the earlierjurists have put this condition in cash sales only andnot in credit sales.

Therefore, it is not necessary that the purchasertakes the delivery of the sold property before he

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surrenders it as mortgage to the seller. The onlyrequirement would be that the point of time whereby theproperty is held to be mortgaged should necessarily bespecified, because from that point of time, the propertywill be held by the seller in a different capacity whichshould be clearly earmarked. For example, A sold a carto B on first of January for a price of Rs. 500, 0001-to be paid on 30th June. A asked B to give a securityfor payment at the due date. B has not yet takendelivery of the car and he offered to A that he shouldkeep the car as a mortgage from 2nd January. If the caris destroyed before 2nd of January the sale will beterminated and nothing will be payable by B. But if thecar is destroyed after the second of January, sale isnot terminated, but it will be subject to the rulesprescribed for the destruction of a mortgage. Accordingto Hanafi jurists, in this case, the seller will have tobear the loss of the car, to the extent of its marketprice or its agreed sale price, whichever is lesser.Therefore, if the market price of the car was 450, 0001-he can claim only the remaining part of the agreed saleprice (i.e. Rs. 50, 0001- in the above example). If themarket price of the car is Rs. 500, 0001- or higher,nothing can be claimed from the purchaser.

This is the view of Hanafi School. The Shafi'i andHanbali jurists hold that if the car is destroyed by thenegligence of the mortgagee, he will have to bear theloss, according to its market price, but if the car isdestroyed without any fault on his part, he will not beliable to anything, and the purchaser will bear the lossand will have to pay the full price.11 It is clear fromthe above example that the possession of A over the caras a seller carries effects and consequences differentfrom his possession as a mortgagee and therefore it isnecessary that the point of time on which the car isheld by him as a mortgagee should clearly be defined.Otherwise different capacities will be mixed up givingrise to dispute and rendering the security invalid.

GUARANTEEING THE MURABAHAH:

The seller in a Murabahah financing can also ask thepurchaser/client to furnish a guarantee from a third

11 See Ibn Qudamah, Al-Mughni, 4:442; al-Ghazzali, al-Wasit, 3:509; Ibn'Abidin, Radd al-Muhtar, 5:341.

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party. In case of default in the payment of price at thedue date, the seller may have recourse to the guarantor,who will be liable to pay the amount guaranteed by him.The rules of Shari'ah regarding guarantee are fullydiscussed in the books of Islamic Fiqh. However, I wouldpoint out to two burning issues in the context ofIslamic banking.

The guarantor in the contemporary commercialatmosphere does not normally guarantee a payment withouta fee charged from the original debtor. The classicalFiqh literature is almost unanimous on the point thatthe guarantee is a voluntary transaction and no fee canbe charged on a guarantee. The most the guarantor can dois to claim his actual secretarial expenses incurred inoffering the guarantee, but the guarantee itself shouldbe free of charge. The reason for this prohibition isthat the person who advances money to another person asa loan cannot charge a fee for advancing a loan, becauseit falls under the definition of Riba or interest whichis prohibited. The guarantor should be subject to thisprohibition all the more, because he does not advancemoney. He only undertakes to pay a certain amount onbehalf of the original debtor in case he defaults inpayment. If the person who actually pays money cannotcharge a fee, how can fee be charged by a person who hasmerely undertaken to pay and did not pay anything inactual terms?

Suppose, A has borrowed 100 US dollars from B whoasked him to produce a guarantor. C says to A, "I payoff your debt to B right now, but you will have to payme 110 dollars at a later date." Obviously 10 dollarscharged from A are not allowed, being interest. Then Dcomes to A and says, "I stand as a guarantor to you, butyou will have to pay me 10 dollars for this service." Ifwe allow charging a fee for guarantee, it will mean thatC cannot charge 10 dollars, despite the fact that he hasactually paid the amount, and D can charge 10 dollars,despite the fact that he has merely committed himself topay only when A fails to pay. This being unfairapparently, the classical Muslim jurists have forbiddenthe charging of a fee for guarantee, so that both C andD, in the above example, may stand on equal footing.

However, some contemporary scholars are consideringthe problem from a different angle. They feel thatguarantee has become a necessity, especially ininternational trade where the sellers and the buyers donot know each other, and the payment of the price by thepurchaser cannot be simultaneous with the supply of thegoods. There has to be an intermediary who can guarantee

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the payment. It is utterly difficult to find theguarantors who can provide this service free of chargein required numbers. Keeping these realities in view,some Shari'ah scholars of our time are adopting adifferent approach. They say that the prohibition ofguarantee fee is not based on any specific injunction ofthe Holy Qur'an or the Sunnah of the Holy Prophet(PBUH). It has been deduced from the prohibition of Ribaas one of its ancillary consequences. Moreover,guarantees in the past were of simple nature. In today'scommercial activities, the guarantor sometimes needs anumber of studies and a lot of secretarial work.Therefore, they opine, the prohibition of the guaranteefee should be reviewed in this perspective. The questionstill needs further research and should be placed beforea larger forum of scholars. However, unless a definiteruling is given by such a forum, no guarantee fee shouldbe charged or paid by an Islamic financial institution.Instead, they can charge or pay a fee to cover expensesincurred in the process of issuing a guarantee.

PENALTY OF DEFAULT:

Another problem in Murabahah financing is that if theclient 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 theperiod of default. But in Murabahah financing, once theprice is fixed, it cannot be increased. This restrictionis sometimes exploited by dishonest clients whodeliberately avoid paying the price at its due date,because they know that they will not have to pay anyadditional amount on account of default.

This characteristic of Murabahah should not create abig problem in a country where all the banks andfinancial institutions are run on Islamic principles,because the government or the central bank may develop asystem where such defaulters may be penalized bydepriving them from obtaining any facility from anyfinancial institution. This system may serve a deterrentagainst deliberate defaults. However, in the countrieswhere the Islamic banks and financial institutions areworking in isolation from the majority of financialinstitutions run on the basis of interest, this system

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can hardly work, because even if the client is deprivedto avail of a facility from an Islamic bank, he canapproach the conventional institutions.

In order to solve this problem, some contemporaryscholars have suggested that the dishonest clients whodefault in payment deliberately should be made liable topay compensation to the Islamic bank for the loss it mayhave suffered on account of default. They suggest thatthe amount of this compensation may be equal to theprofit given by that bank to its depositors during theperiod of default. For example, the defaulter has paidthe price three months after the due date. If the bankhas given to its depositors a profit at the rate of 5%,the client has to pay 5% more as compensation for theloss of the bank. However, the scholars who allow thiscompensation make it subject to the followingconditions:

(a) The defaulter should be given a grace period ofat least one month after the maturity date during whichhe must be given weekly notices warning him that heshould pay the price, otherwise he will have to paycompensation.

(b) It is proved beyond doubt that the client isdefaulting without valid excuse. If it appears that hisdefault is due to poverty, no compensation can beclaimed from him. Indeed, he must be given respite untilhe is able to pay, because the Holy Qur'an has expresslysaid,

And if he (the debtor) is short of funds, then he must be given respiteuntil he is well off. (2:280)

(c) The compensation is allowed only if theinvestment account of the Islamic bank has earned someprofit to be distributed to the depositors. If theinvestment account of the bank has not earned profitduring the period of default, no compensation shall beclaimed from the client.

This concept of compensation, however, is notaccepted by the majority of the present day scholars. Itis the considered opinion of such scholars that thissuggestion neither conforms to the principles ofShari'ah nor is it able to solve the problem of default.First of all, any additional amount charged from adebtor is Riba. In the days of Jahiliyyah (before Islam)the people used to charge additional amounts from theirdebtors when they were not able to pay at the due date.They used to say,

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“Either you pay off the debt or you increase the payable amount.”

The aforementioned suggestion of paying compensationto the creditor/seller resembles the same attitude. Itcan be argued that the above suggestion is theoreticallydifferent from the practice of Jahiliyyah in that thesuggestion is to grant the debtor a grace period of onemonth to make sure that he is avoiding payment without avalid cause and to exempt him from compensation if itappears that his non-payment is due to poverty or ahardship. But in practical application of the concept,these conditions are hardly fulfilled, because everydebtor may claim that his default is due to hisfinancial inability at the due date, and it is verydifficult for a financial institution to hold an inquiryabout the financial position of each client and toverify whether or not he was able to pay. What the banksnormally do is that they presume that every client wasable to pay unless he has been declared as bankrupt orinsolvent. It means that the concession allowed in thesuggestion can be enjoyed only by the insolvent people.Obviously, insolvency is a rare phenomenon, and in thisrare situation, even the interest- based banks cannotnormally recover interest from the borrower. Therefore,the suggestion leaves no practical and meaningfuldifference between in interest based financing and anIslamic financing. So far as grace period is concerned,it is a minor concession which is sometimes given by theconventional banks as well. Once again, in practicalterms, there is no material difference between interestand the late payment charged as compensation.

It is argued in favor of charging compensation thatthe Holy Prophet (PBUH) has condemned the person whodelays the payment of his dues without a valid cause.According to the well-known Hadith he has said

The well-off person who delays the payment of his debt, subjects himself to punishment and disgrace.12

The argument runs that the Holy Prophet (PBUH) haspermitted to inflict a punishment on such a person. Thepunishments may be of different kinds, including theimposition of a monetary penalty. But this argumentoverlooks the fact that even if it is assumed thatimposing fine or a monetary penalty is allowed in

12 Sahih al-Bukhari, Hadith no. 2400, with Fath al-Bari, 5:62.

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Shari'ah,13 it is imposed by a court of law and isnormally paid to the government. Nobody has allowed asituation where an aggrieved party imposes the fine onits own (and for its own benefits) without a judgment ofa court, competent to decide the matter.

Moreover, had it been a recognized punishment, itshould have been imposed even if the investment accounthas earned no profit during that period, because theguilt of the defaulter is established and it has nonexus with the profit of the investment account of thebank.In fact, the suggestion of compensation equal to the rateof profit of the investment account is based on theconcept of opportunity cost of money. This concept isforeign to the principles of Shari'ah. Islam does notrecognize opportunity cost of money, because after theelimination of interest from the economy, money has nodefinite return. It is always exposed to loss as well asit has the ability to earn a profit. And it is the riskof loss which makes it entitled to gain a return.

Another point is worth attention. The one whodefaults in payment of debt is, at the most, like athief or a usurper. But the study of the rulesprescribed for theft and usurpation would show that athief has been subjected to very severe punishment ofamputating his hands, but he was never asked to pay anadditional mount to compensate the victim of theft.Similarly, if a person has usurped the money of anotherperson, he may be punished by way of ta'zir, but no Muslimjurist has ever imposed on him a financial penalty tocompensate the owner.

Imam al-Shafi'i is of the view that if someone usurpsthe land of another person, he will have to pay the rentof the land according to the market rate. But if he hasusurped money, he will return the equal amount of moneyand not more.14

All these rules go a long way to prove that theopportunity cost of money is never recognized by theIslamic Shari'ah, because, as explained above, money hasno definite return, nor any intrinsic utility.

On the basis of what is stated above, the idea ofcompensation to be charged from a defaulter is notapproved by most of the contemporary scholars. The

13 Many classical jurists do not allow the imposition of fine even by a court of law; however, some classical jurists, like Imam Ahmad and Abu Yusuf allow it and this is the preferred view according to most contemporary jurists.14 Al-Shirazi, al-Muhadh-dhab, 1:370.

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question was thoroughly discussed in the annual sessionof Islamic Fiqh Academy, Jeddah, and it was resolvedthat no such compensation is allowed in Shari'ah.15 Allthis discussion relates to the impermissibility of theproposed compensation in Shari'ah. Now it is to be notedthat this proposal does not solve the problem of defaultat all. To the contrary, it may encourage the debtors tocommit as much default as they wish. The reason is that,according to this suggestion, the defaulter is asked topay compensation equal to the return earned by thedepositors during the period of default. It is evidentthat the rate of return earned by the depositors isalways less than the rate of profit paid by the customerin a Murabahah transaction. Therefore, the customer willbe paying after default, much less than he was payingbefore the default. Therefore, he would willingly acceptto pay this amount and not pay the amount of price whichhe will invest in a more profitable activity. Supposethe rate of profit agreed in a Murabahah transaction ofsix moths is 15% p.a. and the rate of profit declared tothe depositors is 10%. p.a. It means that if the clientwithholds the price of Murabahah after its maturity dateand keeps it for another six months; he will have to paythe compensation at the rate of 10% p.a. which is muchless than the rate of original Murabahah (i.e. 15%). Assuch he will default and enjoy another facility for thenext six months at a lesser rate.

This proposal, therefore, is not only againstShari'ah, but also deficient in meeting the problem ofdefault.

The Alternative Suggestion The question now arises as tohow the banks and financial institutions may solve thisproblem. If nothing is charged from the defaulters, itmay be a greater incentive for a dishonest person todefault continuously. Here is the answer to thisquestion:

We have already mentioned that the real solution tothis problem is to develop a system where the defaultersare duly punished by depriving them from enjoying afinancial facility in future. However, as commentedearlier, this may be only where the whole banking systemis based on Islamic principles, or the Islamic banks aregiven due protection against defaulters. Therefore, upto a time when this goal is reached, we may need someother alternative.

15 Resolution no. 53, Vth Annual Session of the Islamic Fiqh Academy, Jeddah, Journal no. 6, 1:447.

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For this purpose it was suggested that the client,when entering into a Murabahah transaction, shouldundertake that in case he defaults in payment at the duedate, he will pay a specified amount to a charitablefund maintained by the bank. It must be ensured that nopart of this amount shall form part of the income of thebank. However, the bank may establish a charitable fundfor this purpose and all amounts credited therein shallbe exclusively used for purely charitable purposeapproved by the Shari'ah. The bank may also advanceinterest-free loans to the needy persons from thischaritable fund.

This proposal is based on a ruling given by someMaliki jurists who say that if a debtor is asked to payan additional amount in case of default, it is notallowed by Shari'ah, because it amounts to charginginterest. However, in order to assure the creditor ofprompt payment, the debtor may undertake to give someamount in charity in case of default. This is, in fact, asort of Yamin (vow) which is a self-imposed penalty tokeep oneself away from default. Normally, such 'vows'create a moral or religious obligation and are notenforceable through courts. However, some Maliki juristsallow making it justice able,16 and there is nothing inthe Holy Qur'an or in the Sunnah of the Holy Prophet(PBUH) which forbids making this 'vow' enforceablethrough the courts of law. Therefore, in cases of genuineneed, this view can be acted upon. But, whileimplementing this proposal, the following points must bekept in mind. 1. The proposal is meant only to pressurize the debtorson paying their dues promptly and not to increase theincome of the creditor / financier, nor to compensatehim for his opportunity cost. Therefore, it must beensured that no part of the penalty forms part of theincome of the bank in any case, nor can it be used topay taxes or to set-off any liability of the financier.

2. Since the amount of penalty is not deserved by thefinancier as his income, but it goes to charity, it maybe any amount willfully undertaken by the debtor. It canalso be determined on per cent per annum basis.Therefore, it may serve as a real deterrent againstdeliberate default, unlike the former suggestion ofcompensation which, as explained earlier, may tend toencourage the defaults.

3. Since the penalty undertaken by the client isoriginally a self- undertaken vow, and not penaltycharged by the financier, the agreement should reflectthis concept. Therefore, the proper wording of the

16 Al-Hattab, Tahrir al-Kalam (Beirut, 1404 AH), 176.

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penalty clause would be on the following pattern,

The client hereby undertakes that if he defaults in payment of any ofhis dues under this agreement, he shall pay to the charitableaccount/fund maintained by the Bank/Financier a sum calculated onthe basis of ...% per annum for each day of default unless heestablishes through the evidence satisfactory to the Bank/financierthat his non-payment at the due date was caused due to poverty orsome other factors beyond his control.

4. Being a vow of charitable act, it was originallypermissible for the client to give the stipulated amountto any charity of his own choice, but in order to ensurethat he will pay, the charitable account or fundmaintained by the financier/bank is specified in theproposed undertaking. This specific undertaking does notviolate any principle of Shari'ah. However, it isnecessary that the bank or the financial institutionmaintains a separate fund, or at least, a separateaccount for this purpose and the amounts credited tothat account must be spent in well-defined charitiesknown to the client/debtor.

This proposal has now been implemented successfullyin a large number of Islamic financial institutions.

NO ROLL OVER IN MURABAHAH:

Another rule which must be remembered and fully compliedwith is that Murabahah transaction cannot be rolled overfor a further period. In an interest-based financing, ifa customer of the bank cannot pay at the due date forany reason, he may request the bank to extend thefacility for another term. If the bank agrees, thefacility is rolled over on the terms and conditionsmutually agreed at that point of time, whereby the newlyagreed rate of interest is applied to the new term. Itactually means that another loan of the same amount isre-advanced to the borrower. Some Islamic banks orfinancial institutions, who misunderstood the concept ofMurabahah and took it as merely a mode of financinganalogous to an interest-based loan, started using theconcept of roll-over to Murabahah also. If the client

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requests them to extend the maturity date of Murabahah ,they roll it over and extend the period of payment on anadditional mark-up charged from the client whichpractically means that another separate Murabahah isbooked on the same commodity. This practice is totallyagainst the well-settled principles of Shari'ah.It should be clearly understood that Murabahah is not aloan. It is the sale of a commodity the price of which isdeferred to a specific date. Once the commodity is sold,its ownership is passed on to the client. It is no more aproperty of the seller. What the seller can legitimatelyclaim is the agreed price which has become a debt payableby the buyer. Therefore, there is no question ofeffecting another sale on the same commodity between thesame parties. The roll-over in Murabahah is nothing butinterest pure and simple because it is an agreement tocharge an additional amount on the debt created by theMurabahah sale.

REBATE ON EARLIER PAYMENT:

Sometimes the debtor wants to pay earlier than thespecified date. In this case he wants to earn a discounton the agreed deferred price. Is it permissible to allowhim a rebate for his earlier payment? This question hasbeen discussed by the classical jurists in detail. Theissue is known in the Islamic legal literature as (Givediscount and receive soon). Some earlier jurists haveheld this arrangement as permissible, but the majorityof the Muslim jurists; including the four recognizedschools of Islamic jurisprudence do not allow it, if thediscount is held to be a condition for earlierpayment.1719

The view of those who allow this arrangement is basedon a Hadith in which Abdullah ibn Abbas 6 is reportedto have said that when the Jews belonging to the tribeof Banu Nadir were banished from Madinah (because oftheir conspiracies) some people came to the Holy Prophet(PBUH) and said, "You have ordered them to be expelled,but some people owe them some debts which have not yetmatured." Thereupon the Holy Prophet (PBUH) said to them

17 Ibn Qudamah, Al-Mughni, 4:174-75. For a full discussion, see my Arabic book Bahuth fi Qadaya Fiqhiyyah Mu'asirah

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(i.e., the Jews who were the creditors)

Give discount and receive (your debts) soon.18

The majority of the Muslim jurists, however, do notaccept this Hadith as authentic. Even Imam al-Baihaqi,who has reported this Hadith in his book, has expresslyadmitted that this is a weak narration. Even if theHadith is held to be authentic, the exile of Banu Nadirwas in the second year after hijrah, when Riba was notyet prohibited.

Moreover, al-Waqidi has mentioned that Banu Nadirused to advance usurious loans. Therefore, thearrangement allowed by the Holy Prophet (PBUH) was thatthe creditors forego the interest and the debtors paythe principal sooner. Al-Waqidi has narrated that Sallamibn Abi Huqaiq, a Jew of Banu Nadir, had advanced eightydinars to Usaid ibn Hudayr • payable after one year withan addition of 40 dinars. Thus, Usaid • owed him 120dinars after one year. After this arrangement, he paidthe principal amount of 80 dinars and Sallam withdrewfrom the rest.19

For these reasons, the majority of the jurists holdthat if the earlier payment is conditioned withdiscount, it is not permissible. However, if this is nottaken to be a condition for earlier payment, and thecreditor gives a rebate voluntarily on his own, it ispermissible.

The same view is taken by the Islamic Fiqh Academy inits annual session.20

It means that in a Murabahah transaction effected by anIslamic bank or financial institution, no such rebatecan be stipulated in the agreement, nor can the clientclaim it as his right. However, if the bank or afinancial institution gives him a rebate on its own, itis not objectionable, especially where the client is aneedy person. For example, if a poor farmer haspurchased a tractor or agricultural inputs on the basisof Murabahah, the bank should give him a voluntarydiscount.

18 Al-Bayhaqi, al-Sunan al-Kubra, 6:28.19 Al-Waqidi, al-Maghazi, 1:374.20 Resolution no. 66, VIth Session of Islamic Fiqh Academy, Jeddah, Journal no. 7, 2:217.

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CALCULATION OF COST IN MURABAHAH:

It is already mentioned that the transaction ofMurabahah contemplates the concept of cost-plus sale;therefore, it can be effected only where the seller canascertain the exact cost he has incurred in acquiringthe commodity he wants to sell. If the exact cost cannotbe ascertained, no Murabahah can be possible. In thiscase, the sale must be effected on the basis ofMusawamah (i.e. sale without reference to cost). Thisprinciple leads to another rule: the Murabahahtransaction should be based on the same currency inwhich the seller has purchased the commodity from theoriginal supplier. If the seller has purchased it forPakistani rupees, the onward sale to the ultimatepurchaser should also be based on Pakistani rupees, andif the first purchase has occurred in U.S. dollars, theprice of Murabahah should be based on dollars as well,so that the exact cost may be ascertained.

However, in the case of international trade, it maybe difficult to base both purchases on the samecurrency. If the commodity intended to be sold to thecustomer is imported from a foreign country, while theultimate purchaser is in Pakistan, the price of theoriginal sale has to be paid in a foreign currency andthe price of the second sale will be determined in Pak.Rupees.

This situation may be met with in two ways. Firstly,if the ultimate purchaser agrees and the laws of thecountry allow, the price of the second sale may also bedetermined in dollars.

Secondly, if the seller has purchased the commodityby converting Pakistani Rupees into dollars, the exactamount of Pak rupees paid by the seller to convert theminto dollars can be taken as the cost price and theprofit of Murabahah can be added thereon.

In some cases, the bank purchases the commodity fromabroad at a price payable after three months or indifferent installments, and sells the commodity to hisclient before he pays the full price to the supplier.Since he pays the price in dollars, its equivalent inPakistani Rupees are not known at the time when thecommodity is sold to the client. Due to fluctuation inthe price of dollars in Pak Rupees, the bank may have topay more than it anticipated at the time of Murabahahsale. For example, the rate of U.S. dollars at the time

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of Murabahah was Rs. 401- for one dollar. The price ofMurabahah was settled according to this rate, but whenthe bank paid the price to the supplier, the dollar rateincreased to Rs. 411- for one dollar, meaning therebythat the cost of the bank increased by 2.5%. In order tomeet this situation, some financial institutions put acondition in the Murabahah agreement that in case ofsuch fluctuation in currency rates, the client shallbear the additional cost. According to the classicalMuslim jurists, Murabahah based on this condition is notvalid because it leads to uncertainty of the price atthe time of sale. Such uncertainty continues up to adate after three months when the buyer actually pays theprice to the supplier. Such uncertainty renders thetransaction invalid. Therefore, there are followingoptions open to the bank in this issue:

(a) The bank should purchase that commodity on thebasis of LlC at sight and should pay the price to thesupplier before effecting sale with the customer. In thiscase no question of fluctuation in currency rates will beinvolved. The Murabahah price can be determined on thebasis of the market rate of dollars on the date when thebank has paid the price to the supplier.

(b) The bank determines the Murabahah price in USdollars rather than in Pak rupees, so that the deferredMurabahah price is paid by the customer in dollars. Inthis case the bank will be entitled to receive dollarsfrom the customer and the risk of the fluctuation indollar's price will be borne by the purchaser.

(c) Instead of Murabahah, the deal may be on thebasis of Musawamah (a sale without reference to the costof the seller) and the price may be fixed as to coverthe anticipated fluctuation in the currency rates.

SUBJECT MATTER OF MURABAHAH:

All commodities which may be subject matter of sale withprofit can be subject matter of Murabahah, because it isa particular kind of sale. Therefore, the shares of alawful company may be sold or purchased on Murabahahbasis, because according to the Islamic principles, theshares of a company represent the holder's proportionateownership in the assets of the company. If the assets ofa company can be sold with profit, its shares can alsobe sold by way of Murabahah. But it goes without sayingthat the transaction must fulfill all the basic

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conditions, already discussed, for the validity of aMurabahah transaction. Therefore, the seller must firstacquire the possession of the shares with all theirrights and obligations, then sell them to his client. Abuy back arrangement or selling the shares withouttaking their possession is not allowed at all.

Conversely, no Murabahah can be effected on thingswhich cannot be subject - matter of sale, For exampleMurabahah is not possible in exchange of currencies,because it must be spontaneous or, if deferred, on themarket rate prevalent on the date of the transaction.21

Similarly, the commercial papers representing a debtreceivable by the holder cannot be sold or purchasedexcept at par value, and therefore no Murabahah can beeffected in respect of such papers. Similarly, any paperentitling the holder to receive a specified amount ofmoney from the issuer cannot be negotiated. The only wayof its sale is to transfer if for its face value.Therefore, they cannot be sold on Murabahah basis.

RESCHEDULING OF PAYMENTS IN MURABAHAH: If the purchaser/client in Murabahah financing is notable to pay according to the dates agreed upon in theMurabahah agreement, he sometimes requests the seller /the bank for rescheduling the installments. Inconventional banks, the loans are normally rescheduledon the basis of additional interest. This is notpossible in Murabahah payments. If the installments arerescheduled, no additional amount can be charged forrescheduling. The amount of the Murabahah price willremain the same in the same currency.

Some Islamic banks proposed to reschedule theMurabahah price in a hard currency different from theone in which the original sale took place. This wasproposed to compensate the bank through appreciation ofthe value of the hard currency. Since this benefit wasproposed to be drawn from rescheduling, it is notpermissible. Rescheduling must always be on the basis ofthe same amount in the same currency. At the time ofpayment however, the purchaser may pay with the consentof the seller, in a different currency on the basis ofthe exchange rate of that day (i.e. the day of payment)

21 see Arabic treatise Ahkam al-Awraq al-Naqdiyyah

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and not the rate of the date of transaction.

SECURITIZATION OF MURABAHAH:

Murabahah is a transaction which cannot be securitizedfor creating a negotiable instrument to be sold andpurchased in secondary market. The reason is obvious. Ifthe purchaser/client in a Murabahah transaction signs apaper to evidence his indebtedness towards theseller/financier, the paper will represent a monetarydebt receivable from him. In other words, it representsmoney payable by him. Therefore transfer of this paperto a third party will mean transfer of money. It hasalready been explained that where money is exchanged formoney (in the same currency) the transfer must be at parvalue. It cannot be sold or purchased at a lower or ahigher price. Therefore, the paper representing amonetary obligation arising out of a Murabahahtransaction cannot create a negotiable instrument. Ifthe paper is transferred, it must be at par value.However, if there is a mixed portfolio consisting of anumber of transactions like Musharakah, leasing andMurabahah, then this portfolio may issue negotiablecertificates subject to certain conditions more fullydiscussed in the chapter of "Islamic Funds".

SOME BASIC MISTAKES IN MURABAHAH FINANCING:After explaining the concept of Murabahah and itsrelevant issues, it will be pertinent to highlight somebasic mistakes often committed by the financialinstitutions in the practical implementation of theconcept.

1. The first and the most glaring mistake is toassume that Murabahah is a universal instrument whichcan be used for every type of financing offered byconventional interest-based banks and NBFIs.22 Under thisfalse assumption, some financial institutions are foundusing Murabahah for financing overhead expenses of a

22 NBFI: Non-Bank Financial Institution

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firm or company like paying salaries of their staff,paying the bills of electricity etc. and setting offtheir debts payable to other parties. This practice istotally unacceptable, because Murabahah can be used onlywhere a commodity is intended to be purchased by thecustomer. If funds are required for some other purpose,Murabahah cannot work. In such cases, some othersuitable modes of financing, like Musharakah, leasingetc. can be used according to the nature of therequirement.

2. In some cases, the clients sign the Murabahahdocuments merely to obtain funds. They never intend toemploy these funds to purchase a specific commodity.They just want funds for unspecified purpose, but tosatisfy the requirement of the formal documents, theyname a fictitiously commodity. After receiving money,they use it for whatever purpose they wish.

Obviously this is a fictitious deal, and the Islamicfinanciers must be very careful about it. It is theirduty to make sure that the client really intends topurchase a commodity which may be subject to Murabahah.This assurance must be obtained by the authoritiessanctioning the facility to the customer. Then, allnecessary steps must be taken to confirm that thetransaction is genuine. For example:

(a) Instead of giving funds to the customer, thepurchase price should be paid directly to thesupplier.

(b) If it becomes necessary that the client isentrusted with funds to purchase the commodity onbehalf of the financier, his purchase should beevidenced by invoices or similar other documentswhich he should present to the financier.

(c) Where either one of the above two requirements isnot possible to be fulfilled, the financinginstitution should arrange for physical inspectionof the purchased commodities.

Anyhow, the Islamic financial institutions are underan obligation to make sure that Murabahah is a realand genuine transaction of actual sale and is notbeing misused to camouflage an interest-based loan.

3. In some cases, sale of commodity to the client iseffected before the commodity is acquired from thesupplier. This mistake is invariably committed intransactions where all the documents of Murabahah aresigned at one time without taking into account variousstages of the Murabahah. Some institutions have onlyone Murabahah agreement which is signed at the time of

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disbursement of money, or in some cases, at the timeof approving the facility. This is totally against thebasic principles of Murabahah. It has already beenexplained in this article that the Murabahaharrangement practiced by the banks is a package ofdifferent contracts which come into play one afteranother at their respective stages. These stages havebeen fully highlighted earlier while discussing theconcept of Murabahah financing. Without observing thisbasic feature of Murabahah financing, the wholetransaction turns into an interest-bearing loan.Merely changing the nomenclature does not make itlawful in the eyes of Shari'ah. The representatives ofthe Shari'ah Boards of the Islamic banks, when theycheck the transactions of the bank with regard totheir compliance with Shari'ah, must make sure thatall these stages have been really observed, and everytransaction is effected at its due time.

4. International commodity transactions are oftenresorted to for liquidity management. Some Islamicbanks feel that these transactions. being asset-based,can easily be entered into on Murabahah basis, andthey enter the field ignoring the fact that thecommodity operations as in vogue in the internationalmarkets, do not conform to the principles of Shari'ah.In many cases, they are fictitious transactions whereno delivery takes place. The parties end up payingdifferences. In some cases, there are real commoditiesbut they are subjected to forward sales or short saleswhich are not allowed in Shari'ah. Even if thetransactions are restricted to spot Sales, they shouldbe formulated on the basis of Islamic principles ofMurabahah

5. It is observed in some financial institutions thatthey effect Murabahah on commodities already purchasedby their clients from a third party. This is again apractice never warranted by the Shari'ah. Once thecommodity is purchased by the client himself, itcannot be purchased again from the same supplier. Ifit is purchased by the bank from the client himselfand is sold to him, it is a buy- back technique whichis not allowed in Shari'ah, especially in Murabahah.In fact, if the client has already purchased acommodity, and he approaches the bank for funds, heeither wants to set-off his liability towards hissupplier, or he wants to use the funds for some otherpurpose. In both cases an Islamic bank cannot financehim on the basis of Murabahah. Murabahah can beeffected only on commodities not yet purchased by theclient.

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Conclusions:

From the foregoing discussion on different aspects ofMurabahah financing, the following conclusions may besummarized as the basic points to remember:

1. Murabahah is not a mode of financing in its origin.It is a simple sale on cost-plus basis. However, afteradding the concept of deferred payment, it has beendevised to be used as a mode of financing only in caseswhere the client intends to purchase a commodity.Therefore, it should neither be taken as an idealIslamic mode of financing, nor a universal instrumentfor all sorts of financing. It should be taken as atransitory step towards the ideal Islamic system offinancing based on Musharakah or Mudarabah. Otherwiseits use should be restricted to areas where Musharakahor Mudarabah cannot work.

2. While approving a Murabahah facility, thesanctioning authority must make sure that the clientreally intends to purchase commodities which may besubject-matter of Murabahah. It should never be taken asmerely a paper-work having no genuine basis.

3. No Murabahah can be effected for overheadexpenses, paying the bills or settling the debts of theclient, nor can it be effected for purchase ofcurrencies.

4. It is the foremost condition for the validity ofMurabahah that the commodity comes in the ownership andphysical or constructive possession of the financierbefore he sells it to the customer on Murabahah basis.There should be a time in which the risk of thecommodity is borne by the financier. Without having itsownership or assuming the risk of the commodity, thoughfor a short while, the transaction is not acceptable toShari'ah and the profit accruing there from is notHalal.

5. The best way to effect Murabahah is that thefinancier himself purchases the commodity directly fromthe supplier and after taking its delivery sells it tothe client on Murabahah basis. Making the client agentto purchase on behalf of the financier renders thearrangement dubious. For this very reason some Shari'ahBoards have forbidden this technique, except in caseswhere direct purchase is not possible at all. Therefore,

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the agency concept should be avoided as far as possible.6. If in cases of genuine need, the financier appoints

the client his agent to purchase the commodity on hisbehalf, his different capacities (i.e. as agent and asultimate purchaser) should be clearly distinguished. Asan agent, he is a trustee, and unless he commitsnegligence or fraud, he is not liable to any loss so faras the commodity is in his possession as agent of thefinancier. After he purchases the commodity in hiscapacity as agent, he must inform the financier that, infulfilling his obligation as his agent, he has takendelivery of the purchased commodity and now he extendshis offer to purchase it from him. When, in response tothis offer, the financier conveys his acceptance to thisoffer, the sale will be deemed to be complete, and therisk of the property will be passed on to the client aspurchaser. At this point, he will become a debtor andthe consequences of indebtedness will follow. These arethe necessary requirements of Murabahah financing whichcan never be dispensed with. While describing theconcept of "Murabahah as a mode of financing" we havealready identified five stages of Murabahah under agencyagreement. Each and every step out of these five isnecessary in its own right and neglecting any one ofthem renders the whole arrangement unacceptable. Itshould be noted with care that Murabahah is a border-line transaction and a slight departure from theprescribed procedure makes it step in the prohibitedarea of interest-based financing. Therefore thistransaction must be carried out with due diligence andno requirement of Shari'ah should be taken lightly.

7. Two different prices for cash and credit sales areallowed on condition that either of the two options isspecifically elected by the customer. Once the price isfixed, it can neither be increased because of latepayment, nor decreased on earlier payment.

8. In order to assure that the purchaser will pay theprice promptly, he may undertake that in case ofdefault, he will pay a certain amount to the charitablefund maintained by the financing institution. Thisamount may be based on per cent per annum concept, butit must invariably be spent for purely charitablepurposes and should in no case form part of the incomeof the institution.

9. In case of earlier payment, no rebate can beclaimed by the client. However, the institution may atit own option, forego some part of the price withoutmaking it a pre-condition in the agreement.

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MURABAH TO PURCHASE ORDERER 1

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