The concept of Murabaha in a modern Islamic context

One of the main principles of Islamic Banking is to avoidinterest (usury) in all forms of transactions becauseMuslims believe that they are not allowed to deal in usuryand that they have to adopt an interest-free system. Inorder to achieve this, the Muslims have derived their guidingrules from the Islamic principles and used profit sharingmechanism rather than using the prevailing interest ratemechanism. The Muslim Economists have been trying todevelope and present some successful real working examples ofan interest-free economy.The usury "interest" is called in Islam "RIBA" a term whichliterally means increase or addition but from the Islamictechnical point of of view it refers to the addition in theamount of the principal of the loan on the basis of time forwhich it is loaned and the amount of the loan.The objective of the Islamic Banks and Investment Companiesis to develope Islamic forms of transaction that do notinvolve interest which is prohibted in Islam. Islam hasnothing against the modern banking operational techniques oragainst the cooperation or coordination with westerninvestment and banking institutions unless they conflictwith the Islamic rules.The Quran, which is the fundamental source of the Islamicrules and principles has prohibited Riba. One of theimplications of prohibition of Riba is that this prohibitioneliminates all debt financing instruments as they exist inthe traditional banking system. Islam has given somealternative transactions which do not involve Riba dealing.One of the important characteristics of the Islamicfinancial instruments is the Risk and Loss and Profitsharing.The cause of the prohibition of Riba will be discussed indetail in this study- The study will also list and explainsome of the main investment instruments and forms used inthe Islamic Banking.One of the most important forms of transaction developed inthe Islamic Banks and Investment Companies is a form of salecalled Murabaha. Murabaha is the most widely used form oftransaction in the Islamic Banks and in the same time it isthe most frequently subject to criticism. The Murabaharepresents a special form of contracts for sale of goods.It is a Contract of Sale where the seller is obliged todisi cose to the buyer the initial cost of the goods and themargin of profit he marked.The objective of this study is to discuss this special formof transaction, make comments on how it is being practisedin the Islamic Banks and Investment Companies.Being a newly developed investment instrument, the Murabahain its modern application has not been the subject of manybooks or researches. Many books and publications discussedthe subject of the Islamic Banking System but few of themhighlighted the issue of the moderm Murabaha which is adifferent application of the old Islamic traditional form ofMurabaha. The most important publications in this field arewritten recently after the Islamic Banks had adopted theMurabaha Sale Contract in its developed form. One of thebooks written in Murabaha is a book by DR. SAMI H. HOMOUD adistinguished Islamic Banker in the year 1976. The book istitled "DEVELOPMENT OF THE BANKING ACTIVITIES IN CONFORMITYWITH THE ISLAMIC SHARIA". The book discussed andhighlighted all of the banking activities and was notdevoted to Murabaha. Another writer in this field is DR.AHMAD A. ABDULLAH who, in the year 1987, wrote his book"MURABAHA, its principles, conditions and applications inthe Islamic Banks". There are also some other IslamicEconomists who wrote about the Murabaha sale such as Dr.Youssof Al Garadawi who wrote "Murabaha Sale to PurchaseOrderer as applied in Islamic Banks", DR. ABDUL HAMEED ALBAALI, "The Jurisprudence of Murabaha" in addition to the"Scientific and Practical Islamic Banking Encyclopedia"issued by the International Institute of Islamic Banking &Economics.".There are some of the recent publications which discussed theissue of Murabaha in the Islamic Banks and Investment Companies.There are old publications and books that referred to andexplained this form of transaction. These are written by oldMuslim Thinkers and Jurists but, of course, they did not discussthe modern applications of the Murabaha Contract as they were notknown at those early days. The Murabaha Contract has been dealtwith and discussed from different points of view which the writerintends to discuss and elaborate in this study which will bedivided into four chapters.The First Chapter will be concerned with explaining the conceptof the Islamic Banks and Investment Companies showing their maincharacteristics and the points of difference between the IslamicBanks and the Conventional Banks. The chapter also describessome of the important islamic investment instruments which arebeing applied in the Islamic Banks.The Second Chapter of the study will be devoted to explain themeaning of Murabaha both literally and in the Islamic Sharia andthe stand of the different Muslim Jurists towards the definitionof the Murabaha Contract. In the second part of this chapter, theauthor will explain how the Murabaha Sale used to be practicedin the early days of Islam and how it is being applied now a daysin the modern Islamic Banks and Investment Companies.A detailed description of the transaction will be given in thischapter showing how the transaction starts with a purchase orderfrom the client to the Bank which purchases the required goodsunder its name, possesses them and then re-sells them to theclient.The Second Chapter also includes the general and the specialconditions required to achieve a proper Murabaha Contract.The general conditions are the conditions which apply to allcontracts regardless of their type such as the legal capacity ofthe parties, offer and acceptance, valuable consideration andthat the contract should not involve any usury. On the otherhand, the special conditions are those which apply to theMurabaha Sale Contract as a special form of contract. Theseconditions include that the original purchase price should bedisclosed to the buyer, the initial contract must be a valid onein accordance to the principles of the Islamic Sharia and thatthe goods should be owned by the seller at the time of the SaleContract.The third chapter of the study will contain the main problemsfacing the application of the Murabaha Contract in the IslamicBanks and Investment Companies showing that one of the mainissues in this regard is in the execution of the contract in theBanks which, in many cases, affects the properness of theMurabaha. The chapter will also involve in the points ofcriticism which are raised against the application of this formof transaction. Some of the main points of criticism includethat the Murabaha transaction involves usury, that it is a saleof what the seller does not own and that the transaction in itsmoden form was not known at the early days of Islam.All criticisms will be discussed in detail and it will be shownthat some of them are true and genuine and some actions need tobe taken in order to rectify the transaction.In the fourth chapter a summary of the findings of the studywill be given stating the writers opinion and recommendations forthe establishment of a proper application of the Islamic forms oftransaction especially for the Murabaha Sale of Goods. The mostimportant points relate to the qualifications, the concern andthe seriousness of the officials and the executives of theIslamic Banks and Companies who should be always well trained inthe business so that they can be able to face the challenge.-i