Murabaha: Halal or Haram?

 

 

The word Murabaha comes from the Arabic word for profit and simply means a “sale”. In its modern form Murabaha has become the single most popular technique of financing amongst “Islamic” banks all over the world. It has been estimated that 80 to 90 percent of financial operations of some Islamic banks belong to this category. Islamic banks, using Murabaha, provide their customers with financing through buying goods that their customers need, and selling those goods to their customers on a deferred payments basis (1).

The following is an example of a Murabaha contract: Adam approaches a Murabaha bank in order to finance the purchase of a $10,000 automobile from “Cash-Only-Automobiles”. The bank agrees to purchase the automobile from “Cash-Only-Automobiles” for $10,000 and then sell it to Adam for $12,000 which is to be paid by Adam in equal installments over the next two years.

Islamic banks that use this product say that it’s not interest because the amount that Adam owes is fixed and does not increase if he is delinquent on payments. Therefore, we are simply looking at a standard sale wherein a trader buys an item for one price and sells it for an increased price. Put differently, the argument for Murabaha is:

  1. Does Islam allow someone to buy a car for $10,000 and sell it for $12,000? Yes.
  2. Does Islam allow someone to make a purchase on a deferred payment basis? Yes.

From 1 and 2, Neither the bank nor Adam has done anything wrong and Murabaha is permissible in Islam.

Not so fast.

There is a beautifully precise Oath that the courts in many countries require witnesses to give before their testimonies. This Oath includes the following: “I solemnly swear to tell the truth, the whole truth and nothing but the truth…”. Now while it can be said that points 1 and 2 in the argument for Murabaha are the truth, they are not the whole truth. To relay the whole truth, one must not forget to mention that:

The same car that is being sold for $12,000 on a deferred payment basis is being sold for $10,000 on a cash basis.

Now that we have the whole truth, let’s analyze the Murabaha example:

  • Adam has two options:
    1. “Cash-Only-Automobiles” will sell him the car for $10,000 but are not willing to wait to receive the full price.
    2. The Murabaha Bank will sell him the car for $12,000 and is willing to wait two years to receive the full price.
  • Adam’s choice to purchase from the Murabaha Bank reflects his desire to not pay the full price of the car today. In other words, he prefers to pay part of the price today and be indebted with the rest.
  • The Murabaha Bank agrees to be owed by Adam the price of his car in return for the amount that it is owed being $2,000 more than the price of the car today.

Now that the picture is complete, let’s discuss whether Murabaha involves interest (Riba) by first defining interest:

Interest in Islam is the charging of a predetermined return for the use of money (2). The related verse in the Quran, a Muslim’s primary source of jurisprudence, is the following (3):

“O you who believe! Observe your duty to Allah and give up what remains [due to you] from interest, if you are [in truth] believers. And if you do not, then be warned of war [against you] from Allah and His Messenger. And if you repent then you have your principal [without interest]. Wrong not, and you shall not be wronged.” (2: 278-279)

Now the question we must answer becomes clear: Did the bank charge Adam a predetermined return for the use of its money? Clearly yes. The bank charged $2,000 in return for Adam’s use of it’s $10,000 to buy a car. Whether the bank hands Adam the money or it hands the money to the dealership is irrelevant because in either case Adam is the one who decided where it was spent.

The fact that no penalties are assessed if Adam is delinquent on his payments simply means that the amount of interest in the Murabaha contract is fixed at $2,000.

Still not convinced?

Assume Adam goes to a traditional bank and borrows $10,000 at a %9.5 annual interest rate (at this rate he will owe $2,000 in interest in two years). Also assume that the interest on the loan is capped once it reaches $2,000. In other words, once Adam pays $2,000 in interest it stops accruing.

Does any Muslim disagree that the loan to Adam involves interest and is prohibited in Islam?

How is the traditional bank’s loan different from the earlier Murabaha contract??

Do the Muslims making arguments for Murabaha really believe that Allah, with all his glory and wisdom, prohibits the traditional bank’s loan because it does not involve the pointless ceremony of a bank buying the car from the dealership and immediately transferring ownership to Adam?

Remember Allah’s words when he says: “We were not playing when we created the heavens and the earth and everything in between” Quran (21:16)

Further, if Adam pays off the traditional bank’s loan early he will end up paying less in interest than he would with the Murabaha bank’s financing.

As I mentioned, the Murabaha bank hasn’t eliminated interest at all it just guarantees for itself the amount of interest it will collect.

In conclusion, saying that Murabaha is permissible in Islam is nothing less than an insult to Muslims. It implies that Islam includes pointless commandments that carry no value to the adherent.

I am against traditional loans for one reason: they use interest.

But I am against Murabaha for two reasons:

It uses interest AND It insults Muslims through claiming to be Islamic.

Sources:
http://www.islamic-banking.com/murabaha_sruling.aspx
Khan, Mohsin S. and Abbas Mirakhor. Theoretical Studies in Islamic Banking and Finance. North Haledon, NJ: Islamic Publications International, 1987. Pg. 18
Khan, Mohsin S. and Abbas Mirakhor. Theoretical Studies in Islamic Banking and Finance. North Haledon, NJ: Islamic Publications International, 1987. Pg. 19
Khan, Mohsin S. and Abbas Mirakhor. Theoretical Studies in Islamic Banking and Finance. North Haledon, NJ: Islamic Publications International, 1987. Pg. 19

14 comments

  1. The islamic bank should joint venture with automobiles companies. Help them in working capital. While automobile marked up their cars at £12000 for cash.

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      1. My point is that the automobile company should sells cars at $12,000. Customers can either pay $12K on the spot or through installment. That is not riba. To sum things up either way you pay $12K.

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  2. “….That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest…..”

    If there is no risk on behalf of the bank and they make the buyer sign a binding promise before they purchase the vehicle, then its haram. But if they do risk, it may be possible that it is halal depending on a few other factors. Allah knows best.

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    1. the point is not for the bank to take on risk. the point is for the borrower not to be obligated to pay for a loan. if an interest bearing bank starts obligating employees to walk over high rise tight rope before they make any loan they are introducing risk to their process. but this doesn’t make it halal because it does nothing to ease the burden on the borrower.

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  3. Brother, hopefully you read this and answer my question.

    If you say murabaha is haram on the based of “predetermined profit charged by the bank for selling the car in installment”, then how should the bank make it halal?
    How can the bank make profit if they sell the car at the price that they bought it for?

    I thought if the bank bought the vehicle first, acquired the title of the car, and then they turn around and sell the car to you, isn’t that plain sell-buy transaction?

    As for the dealership only sell cars in full price (cash) that’s one transaction, and already completed by the bank.
    Then bank can do whatever they want with the car they bought. They can sell it to anyone at any price. Isn’t this what makes murabaha different from conventional loan?
    That is, the seller must own/posses the item they’re selling. In this case, the bank did.

    Thanks.

    Liked by 1 person

    1. Salam brother Ian,

      Just as with Eenah the transaction is deemed invalid, so too in Murabaha the transaction is invalid despite the appearance of a buy and sell transaction.

      Also, please read my solutions section to learn how the bank can offer Halal financing.

      Thanks,
      Rakaan

      Like

  4. If the bank buys the car, they can only repossess a depreciated car if the owner fails to pay – unlike a loan where there is no depreciation. So there is your bank’s risk in buying/owning the car and then reselling at a higher price.

    Consider another scenario. There are two car dealers, one who sells full cash down at 10k but the other says you can pay the full amount within a month but at a price of 10500. Both car dealers don’t probably own the car but will buy it from a car company and resell it at 500 markup. Is that still riba?

    — concerned

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    1. Regarding your first point, repossessing the car is not a part of the intended flow of the contract. One has to default on their obligations for their car to be repossessed. These obligations which require more than the principal to be returned to the lender are unjustified in Islam. Regarding the second scenario, the dealership which is offering at 10500 is essentially selling at 10000 and charging 500 in interest over a month. There is no other value that the second dealership is offering aside from waiting to receive his money i.e. lending. This is forbidden.

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