Murabahah versus Bank Loan: Concept of Interest and Profit

By Hassan, Shafiqul | Journal of Legal, Ethical and Regulatory Issues, January 1, 2018 | Go to article overview

Murabahah versus Bank Loan: Concept of Interest and Profit


Hassan, Shafiqul, Journal of Legal, Ethical and Regulatory Issues


INTRODUCTION

Undoubtedly murābahah and bank loan are two concepts that can be misconstrued by many non-experts in the field of Islamic economy system. The extent of this has led to hot debate among the promoters of Islamic financial system. The explicit distinction between murābahah and bank loan is consequently obscured in the existing body of knowledge in the recent. It is on this basis that this paper attempts to bridge this gap by making clarification in an explicit way. Since Islam promotes sale and prohibits interest, it is essential to elucidate and clarify both concepts especially by establishing its position from Islamic perspective.

Islamic legal system provides or covers all aspects of human endeavors such as socio economic development. There are different economic theories like partnership (musharakah) developed from Islamic perspective on financial and economic matters. Also, murābahah is another Islamic economic concept which emphatically stresses on sale which murābahah as an Islamic economic concept gives priority to value of time with money (Usmani, 2015). It is an economic paradigm that is distinctive from interest-based finance such as loan in conventional practices. In this regard, Islamic banking and finance has been growing to provide alternatives to conventional system in order to fulfill the prime objectives of the Sharī'ah as literature expounds (Khan & Mirakhor, 1987).

Undoubtedly, there is a misconception with respect to the use and application of murābahah because it is equated with the practice of interest by conventional banks. However, from the view-lens on Sharī'ah, bank can use murābahah but some essential conditions of Sharī'ah must be fulfilled. It is essential to give justification for the practice of murābahah transaction either by Islamic banks or Islamic private institutions which has been demonstrated in the theoretical framework of murābahah transaction.

Onwards, Classical and modern discourse on the concept of murābahah transaction is explored. In addition, payment in murābahah transaction is explicated in this paper. Different arguments with the practice of murābahah by Islamic banks are underscored and the practice of interest by conventional banks is also comparatively explored alongside with the explanation of murābahah. The paper draws conclusion from various arguments by the promoters of Islamic financial system and recommendations are made.

LITERATURE REVIEW

This paper explores related literature for conceptualization of murābahah and the practice of bank loan in the contemporary time. The literature is sectionalized into various sub-headings such as:

1. Theoretical framework of murābahah transaction;

2. Classical and modern concept of murābahah transaction;

3. Payment in murābahah transaction;

4. Practices of murābahah by Islamic banks and interest by conventional banks.

Each of these is elaborated in the subsequent sub-headings.

THEORETICAL FRAMEWORK

This section underscores the theoretical framework of this paper. Theoretically, Islamic legal system or Islamic jurisprudential rules provides a framework for the practice of murābahah as a distinctive entity different from the practice of interest by conventional banks (Yousef, 2004). This framework considers the justification from both the Qur'ān and Hadīth of the Prophet. Similarly, the viewpoints of promoters of Islamic finance in the contemporary time are lucidly explicated in connection with the Maqāsid al-Sharī'ah of Ibn Ashur. The financial transaction under the explanation of Maqāsid al-Sharī'ah by a contemporary Muslim scholar known as Ibn Ashur is directly or indirectly linked with the concept of murābahah and it is consequently used as a theoretical framework of this paper. Ibn Ashur (2006) offers several Qur'änic and prophetic injunctions that wealth is considered as a preservation of human social order (Ibn & El-Mesawi, 2006). Ibn Ashur's theory of expanding the scope of Maqāsid al- Sharī'ah is relevant to this paper because murābahah is used as a mechanism for fulfilling human needs (Ibn & El-Mesawi, 2006). …

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