Islamic Sale of Contract: Murabahah in Islamic Finance System

This research paper consists of the arguments that depict the criticism against the murabahah’s operation according to the Product of Islamic Banking in the world that is contemporary. The main objective of the research is to find out more about the operations of the Murabha and how the Murabha is something that is largely distinct from bank interest.

RUNNING HEAD: ISLAMIC SALE OF CONTRACT
Islamic Sale of Contract
Name of the student
Name of the university
Author Note

1
ISLAMIC SALE OF CONTRACT
Abstract:
The system of Islamic Banking system has emerged, which led to the development of financial
transaction, which is not considered in the books of classics on the system of Islamic finance.
One of the main inventions is Murabhah. As most of the products that are newly introduced
regarding the system of Islamic Finance, where it is referred as the Products of Islamic Finance
or Products of Islamic Banking. There is presence of many arguments that are provided in
against or for the lawfulness of Murabahah under the principle of Islamic Finance. Among all the
criticism against the operation the pronounced deprecation against the suggestion Murabahah is
considered as the closest in the transaction in the matter of conventional banks and therefore it
cannot be lawfully allowed in the Islamic Finance System. This research examines the
suggestions and criticism whether the critic is tenable regarding the matter of Islamic Law and is
provided in the market of finance regarding the matter of Islamic Law and the provided market
of finance is facing many challenges in the contemporary world of Muslims.

2
ISLAMIC SALE OF CONTRACT
Table of Contents
1. Introduction to the Problem......................................................................................................2
2. Research Objective...................................................................................................................4
3. Review of Literature.................................................................................................................5
3.1. Purporse and Operation of Murabahah.............................................................................5
3.2. Principal and Condition Involved in the Transaction of Murabahah:...............................7
3.2.1. Condition for a Valid Sale of Murabahah:....................................................................7
3.2.1.1. Information on the primary price of the parties:........................................................7
3.2.1.2. Information regarding the margin of profit:..............................................................7
3.2.1.3. Fungibility of the original price.................................................................................7
3.2.1.4. The products where the murabahah is traded must not be found to eligible for riba:
8
3.2.1.5. The validity of the initial contract:............................................................................8
3.2.1.6. Main steps in the Transaction of Murabahah:...........................................................8
4. Research Methods....................................................................................................................9
5. Data Analaysis and Critique of the Criticism:..........................................................................9
Conclusion:....................................................................................................................................10
Reference:......................................................................................................................................11

3
ISLAMIC SALE OF CONTRACT
1. Introduction to the Problem
The facility of murabahah is deemed to be same as the conventional financing bank along
with mark-up or the profit rate, which is contemporary with the interest rate. The difference
between the two will be disappeared if proper care is not taken. Shari’ah imposes various
constraints, and some rules and regulations are prescribed so that the facility of murabahah will
be free from riba. There are several conditions that focus on keeping the product free from gharar
that is prohibited is also being prescribed. It has been seen that there is a modern innovation from
the system of Islamic Finance which is known as the product of Islamic Banking, which is
known as Murabahah which is translated as ‘cost-plus-sales’. Murabahah is known as the
backbone of the banking systems of Islam is mainly used for the system of finance regarding the
purchase of the raw materials that consist of the consumer durable, equipment and machinery.
According to this nature it is considered as the form of trust sale in the field of system of Islamic
Finance. Because of the involvement of the trust to the aspiration and operation of an individual
in which the Murabahah can be met. It has embraced widely and the consumer of the Islamic
banks throughout the globe choosing preference all over the product of banking system of
Australia. Under the principle of Islamic Finance the legality of Murabahah is grounded, there is
a placement of reliance for the maximum proof of the Islamic Law and the early practices in the
Muslim generation (Afkar 2015). There are many proofs that are found for giving the
justification, murabahah is not free form the restraint of condemnation and criticism of the jurist
those who are contemporary. The pronouncement of the deprecation for the operation is the main

4
ISLAMIC SALE OF CONTRACT
argument that murabahah is very close to the interest of the bank which is considered as the form
of riba and even it is considered as the same interest of the bank which is known with another
nomenclature. Some of the scholars from the religion of Muslim rejects murabahah as they
considered it as another product of riba which is considered as product is packed in some other
brand along with the similar ingredient and taste where the interest of the bank is provided to the
conventional bank. There were certain reasons that are provided for criticism.
2. Research Objective
This research paper consists of the arguments that depict the criticism against the
murabahah’s operation according to the Product of Islamic Banking in the world that is
contemporary. The main objective of the research is to find out more about the operations of
the Murabha and how the Murabha is somethingthat is largely distinct from bank interest.

5
ISLAMIC SALE OF CONTRACT
3. Review of Literature
3.1. Purporse and Operation of Murabahah
In the simpler term, it is also known as the bai’ as-salam al-hal, which is stated as the sale
on the cost price where the price for the payment is deferred to a later date. It is the arrangement
of finance where it is observed that the fixed profit is being agreed between the buyer and the
seller where the knowledge of the cost price of the product is known to the buyer as well as the
seller. A famous author Siddiqi described it in the following mentioned way: “Murabahah is
stated as the sale in which the profit margin, is agreed mutually between the seller and the buyer
(Ahmed 2014). The expense or the sum of the sale price that includes the profit margin that is
agreed that may be deferred or immediate either in instalment or in a lump sum.”
The magnitude of the profit is agreed in the form of a particular amount or it should be
stated in the specific percentage or ratio form. The bank and the client of the bank stand in the
position of the finance facilitator between the ultimate buyer and the original vendor, through the
role of facilitation that helps in the transaction of the business and makes the profit. At the first
stage of operation and introduction murabahah is considered as the type of sale arrangement, it is
used primarily as a type of finance in the modern organisation of Islamic finance. According to
this statements murabahah is known to be of two types, namely murabahah to subscribers and
simply murabahah. The earlier one is “when the goods are being marketed from the seller to the

6
ISLAMIC SALE OF CONTRACT
buyer at a price equal to that of the margin of cost plus profit according to the desire” the next
one is the form which is used commonly by the modern system of finance in Islamic banking
involving three parties that is the seller, the buyer and the subscriber (Al-Muharrami, S., 2014). It
also involves the buyer those who intermediary for the expertisation as the buyer needs finance.
The murabahah’s operation, according to recent times, is stated as follows:
The contracting parties that are the customer and the bank should make some promise
that is unbinding for entering into the arrangement, and the marked price should not be
mentioned before the commodity delivery. In this situation, the parties of the contract agree
mutually, and both the contracting parties will be held liable for completing the contract, and the
marked price should be present before the delivery of the item.
The primary form is permissible as there is no promise that is said to be binding among
the contractual parties as to the completion of the agreement and the consumer will not be liable
for compensating the bank if the delivery item perishes before the delivery that will be final
(Ariff 2014). At the same time, there is a presence of risk because there will no surety from the
bank that the consumer will buy the item from it along with the profit.
The second and the third form is considered to be unlawful as in the second case, the
accruable profit to the bank is being fixed before the actual delivery of the item. In the third case
it is similar to the arrangement which is obtained under banks those are conventional, both the
contractual parties agree as the parties are held liable for the completion of the contract and the
accrual of the fixed profit to the bank before the delivery of the item or the commodity. It is
observed that the transacting object in which the whole activity is involved in murabahah is the

7
ISLAMIC SALE OF CONTRACT
product where the bank consumer is in need (Shofawati 2014). This is important to be noted that
it serves several purposes to appreciate the extension of justification or the arguments for those
who convict the transaction of murabahah.
3.2. Principal and Condition Involved in the Transaction of Murabahah:
There are five conditions that are laid down for fulfilling any sale on the arrangement of
murabahah for the validity under the Islamic law. There is a presence of four principal steps that
is being designed and is required to be followed for the transaction of murabahah. That is not
observed in the method in which the bank interest is practised in the bank those are conventional.
The following are the steps and the conditions for the appreciation that is to being researched:
3.2.1. Condition for a Valid Sale of Murabahah:
3.2.1.1. Information on the primary price of the parties:
There should be a presence of certainty regarding the actual price of the product of sale as
it was mentioned in the contract. This is considered to avoid the involved transaction in gharar
(Guney 2015). The sale is based on the arrangement of murabahah will be invalidated for the
defectiveness if the primary price of the product is not known to the contracting parties.
3.2.1.2. Information regarding the margin of profit:
As the contractual parties enter into the contract of murabahah the quantum of profit must
be specified by the party selling the item which is expressed regarding the ratio, cash sum and
the percentage (Song and Oosthuizen 2014). Failing to do will help in defeating the essence of
murabahah and wholly invalidating the transaction.
3.2.1.3. Fungibility of the original price:

8
ISLAMIC SALE OF CONTRACT
This explains that the price should be measurable in terms of volume, weight and
number. If the product, the actual subject matter of the murabahah is found to be measured in the
unit of tons, the price of the ton of the goods should have the capability of using in ascertaining
and calculating the price that is found to be original. If this not found to be done then the
murabahah will found to be not valid.
3.2.1.4. The products where the murabahah is traded must not be found to
eligible for riba:
It is necessary that the conducted transaction should be in a way that it will not provide
any space to riba. Thus the transactional focus should be on the product and not on the increase
in the released money. In this situation where the consumer defaults the bank imposes a penalty
if it is stipulated in the actual agreement of the murabahah even, it cannot be included as the
income of the bank but can be spent for the purpose of charity (Pappas et al 2017). Apart from
imposing a penalty by the bank, it is essential for certain conditions like imposing penalty during
the time of pendency for the transaction of murabahah, and the consumer is in the fact that good
status of finance is required for a completing the contract of murabahah.
3.2.1.5. The validity of the initial contract:
It is noted that the two contracts are found to be involved in the transaction of
murabahah. One the transaction is between the Vendor and the Bank and the last purchaser of the
product who is considered as the consumer of the Bank and in whose favour the murabahah
agreement has been prepared (Hanif 2014). If the condition stipulates the contract between the
vendor and the bank that will be invalid or defective for any reason, the agreement of murabahah
developed on it will be invalid or defective as per the case.

9
ISLAMIC SALE OF CONTRACT
3.2.1.6. Main steps in the Transaction of Murabahah:
In the finance market of finance, the following steps are identified as the principal step
that should be followed for the execution of a legally valid murabahah:
The interest has been shown by the client for buying a specific asset from the bank for a
particular price. The next step is that the client identifies the vendor advises and selects the
product, including the cost price and the name of the vendor to bank not orally but in writing.
The bank hires the customer as an agent known as the wakil for acquiring the asset on behalf of
the bank. The bank collects the offer and the asset for selling it to the client. The delivery of the
asset will be done by the vendor to the client. There is no need for physical delivery, but it
should be constructive. The next step is that the agency comes to an end. There is an acceptance
of the offer by the client, and immediately the bank sells the asset towards the client with the due
payment on a specific date that will be agreed in future.
4. Research Methods
This research as seen from the discussion above has made use of qualitative research
methods such as the in-depth review of secondary and scholarly sources on the subject of the
study. The literature reviewed has been located through scholarly journals by first conducting a
broad based search on Islamic law and then narrowing it down to Islamic law and finance.
5. Data Analaysis and Critique of the Criticism:
Content and textual analysis techniques are deployed to arrive at an understanding of the
key takeaways from the above mentioned literature review. In the starting points, it has been
observed about definitions of both the interest and the murabahah considering the object and the
subject of the transaction in two different activities of finance. Without providing any repetition
that is unnecessary, both the analysis of the transactions has been observed not equal neither in

10
ISLAMIC SALE OF CONTRACT
subject or object. The explanation or the definition of the murabahah falls under the transaction
of business which is allowed in Islam where the interest is found in the scope of riba which is not
allowable.
Conclusion:
In the transaction of Islamic finance, all the rules and regulations of the commercial
ethics pronounced by Islamic law should be observed. All the latest model of the transaction of
finance which is brought forward by the emerging of the banking system of Islam that is
concerned following the norms of Islamic finance. Among these several newly introduced
system of finance cost-plus-sale (murabahah) is being rejected by few scholars because it has not
fulfilled the requirement of the norms as it contains proximity to the interest of the bank (Islam
2015). This research is about the several arguments that have been discussed along with several
lines of critics. It has been disclosed in this paper where the proper understanding of the
murabahah operation is explained clearly and also the main criticisms in operation by the
organisation of Islamic finance that has been observed to be misconceived.

11
ISLAMIC SALE OF CONTRACT
Reference:
Afkar, T., 2015. Financing mechanism of islamic banking. The International Journal of Social
Science, 32(1).
Ahmed, H., 2014. Islamic banking and shari’ah compliance: a product development
perspective. Journal of Islamic Finance, 176(3192), pp.1-15.
Al-Muharrami, S., 2014. Islamic Banking: Basic Guidelines for Researchers. European Journal
of Social Sciences, 45(3), pp.262-281.
Ariff, M., 2014. Whither islamic banking?. The World Economy, 37(6), pp.733-746.
Guney, N., 2015. Murābaḥah financing revisited: The contemporary debate on its use in Islamic
banks. Intellectual Discourse, 23.
Hanif, M., 2014. Differences and similarities in Islamic and conventional banking. International
Journal of Business and Social Sciences, 2(2).
Islam, S.M., 2015. Islamic banking: A true alternative to interest-based conventional
banking. International Scholar Journal of Accounting and Finance, 1(1), pp.33-40.
Pappas, V., Ongena, S., Izzeldin, M. and Fuertes, A.M., 2017. A survival analysis of Islamic and
conventional banks. Journal of Financial Services Research, 51(2), pp.221-256.

12
ISLAMIC SALE OF CONTRACT
Saiti, B., Wahab, H.A. and Ahmad, K., 2017. Contracts, structures, and computation mechanisms
of Islamic bank retail financing products: a critical assessment. In Islamic Banking (pp. 81-125).
Palgrave Macmillan, Cham.
Shofawati, A., 2014. Murabahah financing in Islamic banking: Case study in Indonesia.
In Proceedings of 5th Asia-Pacific Business Research Conference 17–18, Hotel Istana, Kuala
Lumpur, Malaysia, ISBN: 978-1-922069-44 (Vol. 3).
Song, M.I. and Oosthuizen, C., 2014. Islamic banking regulation and supervision: Survey results
and challenges (No. 14-220). International Monetary Fund.