Islamic Finance and one of its tool

Islamic finance is based on the elimination of interest and speculation uncertainty from financial transactions. Islamic contracts are based on these criteria.

Murabaha

This contract involves the sale of goods on which should be delivered immediately with their payment being delayed until an agreed upon date. The price of goods has a profit margin agreed upon by the buyer and the seller attached to it . Normally, the market price of goods is shared between the buyer and seller in this contract. Murabaha is a form of sale based on trust, whereby, the buyer truly trusts that the seller has honestly disclosed all the necessary cost encored. After cost discussions, a profit margin is agreed upon preferably as a fixed cost. In the event that an international Murabaha transaction is bound by a foreign currency lets say the Dinar, the importer would demand authorization and confirmation letters from the buyer and seller stating the currency in which the transaction shall be carried out. The registration of the transaction can only take place after both parties have agreed on which currency the transaction should be carried.

If the buyers’ records are in a currency other than the Dinar, e.g. the Euro, it is his right to demand that the transaction be registered in his own currency. Murabaha does not prohibit the use of western currency and leave’s matters regarding exchange rates to the users’ discretion. It is permissible to transact using any type of currency and one is also allowed to convert the currency used on the transaction into their own currency at the exchange rates available on the date of purchase.

The amount of profit gained from a Murabaha transaction is not a reward for using the investor’s money. Simply put, in a Murabaha transaction, the investor cannot take money without performing any service other than use his money for the transaction. Money cannot increase without any labor input (Hosein, par, 10).  In Murabaha, an item is bought at its original cost and sold to someone else for a profit to be paid over time. The profit and the time period are factors agreed upon by the buyer and seller.

Interest (Riba) as offered in a conventional bank differs from Murabaha in that here money is lent to someone for a profit. Murabaha is trade that involves selling of goods at a profit which is paid according to the agreement of the buy and the seller.

It is not forbidden to transact with a person who in the interests of honest trade has traced the owner of goods he wants to buy provided that the terms are those agreed upon between him and the owner. If he is to enter into a new contract with you for the same goods, it is not permissible to transact with him for you will be taking twice the value of the goods from him which is Haram.

Murabaha is an interesting way of doing business where the buyer is asked how much profit he thinks is fair for the product he wants to buy. When considering today’s  conventional trade, whereby, some of the products on sale are grossly overpriced and profiteering is the order of the day, where little or no consideration is paid to the consumers. Murabaha's way of doing business would be good especially now when economies are battered by the global economic meltdown.

Ahmad, Aldouni. “Islamic modes of finance and the role of the sukuk”, Q finance,  n.d.. Web. 20 May. 2012.

Ahmed, Mohamed & Sattar. “Abdul. Sharia Opinions (Fatwa) on Murabaha”, Dallah Al-Baraka. N.d. Web. 20 May 2012.

Fareed, Faraz. "Islamic Finance Basics – What is Murabaha, Ijara, and musharakah /mudarabah?" Islamic finance affairs, May 25, 2007.  Web. 20 May 2012. <islamicfinanceaffairs.wordpress.com>.

Hosein, Nazar. "Islam, Murabaha and Fixed Deposits: Islamic scholar Imran Nazar Hosein." Imranhosein.org. Nov. 2011. Web. 20 May 2012.

Zaheer, Khalid. Is charging more on credit sales (Murabaha) permissible? n.d.

Web. 20 May 2012. <Khalid Zakeer.com>.