Islamic Banking and Interest: A Study of the Prohibition of Riba and Its Contemporary Interpretation

By Abdullah Saeed | Go to book overview

CHAPTER FIVE

MURĀBAḤA FINANCING MECHANISM

Islamic banking theorists argue that Islamic banking should be based on Profit and Loss Sharing (PLS) rather than interest. Islamic banks in practice, however, have found from the very beginning that PLS-based banking is difficult to implement as it is risk-laden and uncertain. The practical problems associated with this financing have led to its gradual decline in Islamic banking, and to a steady increase in the utilisation of 'interest-like' financing mechanisms. One such mechanism is termed 'murābaḥa'. This chapter investigates murābaḥa, the most important investment mechanism in Islamic banking today. It identifies the nature of the murābaḥa contract and its application in Islamic banking, and compares murābaḥa financing with fixed interest based financing in several key areas.


Murābaḥa in fiqh

There are three parties, A, B and C, in a murābaḥa sale. A requests B to buy some goods for A. B does not have the goods but promises to buy them from a third party, C. B is a middleman, and the murābaḥa contract is between A and B. This murābaḥa contract is defined as a “sale of a commodity at the price which the seller (B) paid for it originally, plus a profit margin known to the seller (B) and the buyer (A).”1 Since its inception in Islamic law, the contract of murābaḥa appears to have been utilised purely for commercial purposes. Udovitch suggests that murābaḥa is a form of commission sale, where a buyer who is usually unable to obtain the commodity he requires except through a middleman, or is not interested in the difficulties of obtaining it by himself, seeks the services of that middleman.2

The Qur'ān, however, does not make any direct reference to murābaḥa, though there are several references therein to sale, profit, loss, and trade. Similarly, there is apparently no ḥadīth which has a direct reference to murābaḥa. Early scholars like Mālik and Shāfi'i who specifically said that a murābaḥa sale was lawful, did not support their view with any ḥadīth. AlKaff, a contemporary critic of murābaḥa, concluded that murābaḥa was “one of those sales which were not known during the era of the Prophet or his Companions.”3 According to him, prominent scholars began to express

1 Jazīri, Fiqh, II, pp.278-80.

2 Udovitch, Partnership and Profit, p.221.

3 al-Kaff, Does Islam Assign Any Value, p.8.

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