Murabaha: An Islamic Sale

Vol 1-Issue 2   Islamic FinanceDifferent types of Sales in Islam

Sales are divided into two categories with respect to cost and price:

1. Bargaining Sale (Musawamah): where the buyer and the seller agree on the selling price without taking into consideration the cost of the merchandise.

2. Trust sales: where the buyer and the seller agree on the price of the merchandise, taking into account its original cost. This type of sale is further subdivided into three types:

a. Murabaha: where the price of the merchandise includes an amount greater than the original cost.

b. Tawliyah: where the price of the merchandise is equal to its cost (i.e., with no profit, nor loss).

c. Wadhee’ah: where the price of the merchandise is less than its cost (i.e., a loss).

Necessary conditions for the validity of the Murabaha sale

1. The buyer should know the cost of the merchandise. If he feels that there has been any deception in setting the price, he has a choice to revoke the sale.

2. The profit should also be known

3. The price and merchandise should not be of the same type (or commodity), otherwise it becomes Riba (Riba Al Hadith, in particular). For instance, if gold is traded with gold, with a difference in the amount it would be riba, and therefore not allowed.

How Murabaha is carried out today

A person wants to buy merchandise but cannot pay its price in cash. He asks the Islamic bank to buy it for him and pay its price in full. Thereafter, the bank buys the merchandise or imports it from the local market and sells it to that person in installments, with a fixed profit that is agreed upon in advance.

Answers to some objections

Skeptics argue that the Murabaha contract involves the sale of the merchandise that is not in the possession of the seller. However, one of the conditions of the Murabaha sale is to ratify the contract only after the bank is in possession of the merchandise. Therefore, this allegation becomes baseless. Another objection raised is that it is a type of loan sale, and a way to circumvent Riba. Once again, this is a false claim because the selling and the buying occur effectively.

Yet another objection raised is that there are two sales in one, which has been forbidden by the Holy Prophet (sa). However, a closer look at the transaction shows that this is not the case. In a Murabaha transaction, the person does not say, “buy this merchandise from me and I will buy it from you at a higher price.” The deal is about a merchandise that the client wants to acquire by buying it in installments from the bank, whom he has asked to purchase from the merchant.

Opponents of Murabaha argue that the promise to buy in a Murabaha contract constitutes an obligation that was not enjoined by the Shariah. However, it is to be noted that the mutual promise between the bank and the client, that includes the promise of the client to buy, and a promise from the bank to execute the sale once it is in possession of the merchandise, is simply a promise and not an obligation. Many Quranic verses and many Ahadeeth have encouraged the fulfillment of promises.

(Adapted from “Selling at a Profit: Murabahah”; Al Jumuah, Vol 12, Issue 11)