Channel: Mansoor Danish
Is Murabahah Financing same as Conventional Financing models?
Is the profit charged under Murabahah permissible?
Is it not the same as interest?
The Murabahah model involves more or less same cash outflow as any interest-based loan, so why should one go for a Murabahah model?
All this and more is discussed in this short video by Mansoor Danish, Islamic Wealth Consultant and Head of Department (BBA) with Islamic Online University.
Salam Alaikum warahmatullahi wabarakatuh in this short discussion, we will be discussing about what is murabaha transaction? And is it permissible from Sharia perspective or not under a murabaha transaction, and many of you might be well aware about Islamic financing principles, you may have heard the term murabaha. So, this is for your knowledge under the murabaha transaction, the one who has the money, which is the financer he will have to buy a product which you want in their own name, you don't have the money, the one who has the money is the finance. So, you can't buy the product, but you approach the finance and you express to him you need to buy a certain product. Now, under
murabaha finance, you will have to acquire the property in the name and the possession has to be transferred to the finance, once the finance has the possession, the financing can enter into an agreement with you to sell it to you at a price higher than the market price. Naturally, the finance will have to look at his own profit. So he will not try and give it to you at the same price. If you want he can. But generally, if he's in the business, he will not offer it to you in the same price what he will do is he will offer it to you say at 5% or 10% extra price and that is the profit that they will be making by selling the product to you, they are not selling money to you, they are using
the money to buy the product that you want, taking complete possession of it, and subsequently they are selling it to you. And when they sell it to you they charge the profit margin of four to 5%. This is how the simple murabaha transaction works. comparing this with conventional banking system, where the finance
is not too interested in knowing what your need may be, they will just want to know if your need is of the money or not. They're not interested in what kind of product if you need the money, you apply for a load, and we will give you the money now you can go and fulfill your requirements with that money.
So in the case of a conventional system, it is the financier who's financing your need of money, it's giving you the money. Now you do with the money what you whatever you wish like and in return of the money they say, if I am giving you $100,000 you need to come back and give me $110,000 $10,000 you need to pay me back extra. So they finance you money. And in return they say when you return me bank the money, you pay me a higher amount. This is how the conventional financing system works. What is the scholarly view on this? Now, as far as the conventional system is concerned, this is purely a rubber, where the finance is just financing your monetary requirement
paying you the money and asking you to do go ahead and do whatever you want with the money As long as you repay them back an additional amount which they call it and interest, the interest amount has to be repaid back to the financing. This is not permissible This is clearly the face of rubber, whether they call it interest, or even suppose they call it a profit, it is clearly rubber because the money is being financed.
In the case of a conventional system, compare it to a permissible murabaha and I'm using the word permissible because there might be some financial institutions who may be using murabaha but may actually be allowing bagdogra so I'm making a segregation by saying there is permissible murabaha and permissible murabaha the condition is that the finance cannot give you the money, but rather the financial will buy the product that you want. Once you acquire the finance acquires the product, the financing now owns that commodity or owns that house or owns that product, once it belongs to the finance, the finance is within his jurisdiction legally, from the Sharia perspective to charge any
profit margin that they want when they want to sell it to you.
Now, why would a customer want to buy from a finance or using permissible murabaha simple, it's because he doesn't have the money to buy right now. And he wants the benefit of paying over a period of time. If he goes to a conventional system, he can still get the same money but it will be purely rubber they will pay you the money and you pay them back a higher amount. But when he goes to the permissible murabaha window, the product is being bought by the financier and now the financing is selling
and transferring the ownership to you.
And for that, the financing gives you a period of time maybe five years or 10 years or 15 years to pay them back, but they charge a profit margin, this is permissible.
There is nothing wrong with this, the scholars agree that this kind of product is permissible, because there is no stipulation of money being paid back in exchange of money. Rather, it is clearly a case of product having being sold to the customer. And the customer is being asked to repay whatever the price of the product was, and whatever was agreed upon to be paid.
Now, a question which many people ask,
in many countries, a permissible murabaha may turn out to be a little more expensive than an interest based system.
Eventually, it may work out to be the same. So what's the difference in one place, they're calling it interest in one place, they're calling it profit. Now, they both are totally different. Very clearly, we can see that in the permissible murabaha transaction, the financier is not supplying money to you and taking back a higher amount of money. But rather the finance is taking the risk of acquiring the property. So he's taking the ownership risk, and all the risks which comes associated with it, he then acquires possession of it, because the Hadith of the Prophet sallallahu alayhi wa sallam, that you cannot sell something which you do not possess, so he's acquiring possession of it,
having acquired possession of it, he will then go ahead and sell it to you, this is permissible, there's nothing wrong. This is not the same as conventional system, where they don't acquire any ownership risk, they just give you the money, they only have what is called a credit risk. That is they paid you the money, and now you need to repay, repay them back the money. And of course, you need to pay them back a higher amount. So if they pay you $100,000, you need to pay them back $105,000. That's not the case with permissible murabaha. That's the first point which we want to make. The second point regarding the cost, it may work out to be same or maybe a little more, that
is not important for us. That discussion is absolutely immaterial. And I can give you the evidence from the life of the Prophet sallallahu alayhi wa sallam,
below the Companion of the Prophet sallallahu alayhi wa sallam came below may Allah be pleased with him came to the prophet and said, Yasuo Allah sallallahu alayhi wa sallam, I have got some fresh dates for you. So the Prophet sallallahu wasallam inquired, where did you manage to get these fresh debts from so be louder, the alarm says you're a fool Allah sallallahu alayhi wa sallam, we had some old dates of years. So I took them to the market. And I exchanged your old dates for some fresh quality, but lower quantity dates. So let's take an example here. Maybe will already Alon who took about 10 kilos of old dates went to the market. He exchanged those 10 kilo old dates, and he bought
in return of it five kilos of higher quality dates. Now, the quantification that I've done is just hypothetical for your explanation for your understanding. But the
had these mentions that belong to the Alon who exchanged inferior old quality dates for fewer high quality dates? Rasulullah sallallahu alayhi wa sallam responds to this transaction, and says, oh, Bella, this is Reba. This is what Riba is, this is the essence of Riba Bella, what you should have done instead, and the Prophet sallallahu wasallam is telling below the way out, he says oh below, what you should have done is taking the old days to the market, sold them for money, acquired the money in your hand, and then the money should have been used to buy fresh quality dates.
Now, I can argue that with that money Bilal may have ended up buying the same amount of dates or below may have ended up buying lesser amount of dates, the cost would have been higher.
But that argument does not stand. What is important is the validity of a transaction. That is what we are interested in. Is the transaction valid? That's the question that we need to understand. Because Allah says in the Quran, that Allah has permitted trade, but forbidden Riba. So we need to be very, very clear on this that we need to go through the permissible trade and avoid Riba and Allah knows best. So in conclusion, what we wish to make it absolutely clear is that murabaha is a permit provided the conditions are being met. And as I mentioned to you that some of the conditions is that you come up in front of the finance and you let them
Know the product and services that you're not services but rather the products that you are interested in, then the financier will buy the product for themselves in their own name, they take the possession, they take ownership risk, they have to take the possession, remember that they have to move it to their dealers go down, if they have a go down, they have to move that product or if it's a property, then all the paperwork by which it can be stablished. And the product or the house now belongs to the dealer.
Once it's done, now, the financing can sit with you negotiate with you fix the profit margin sell it to you.
And once the product is sold to you, you can continue paying them over a period of time, but now the product is yours, if you wish you can sell them off, if you find that the prices of the market have gone up, you can sell it off at a higher price come back make the entire payment to the company. So this is what I want you to clarify as far as murabaha transaction is concerned, I hope this is clear with all of you, inshallah, hope to Allah, it was very important because I saw some people trying to discuss that all the murabaha may become more expensive. That's not important for us. So in short, this is what I wanted to clarify. Now this was very important because some people have been trying
to argue that well, it's the same thing. Some people call it interest some people call profit. No, it's clearly two different things. In one case, it's the money which is being financed, and therefore the price which has been charged for money is interest. Interest is what it's the cost of money. Whereas in the second case, it's the cost of the property that whatever the cost of the property is I'm charging a profit margin on it. quick point I want to make before we conclude is it permissible, therefore, for the dealer to fix a higher market price and sell it to you? The market price is $100,000 I acquired the property in my name now, can I sell it to you at a 5% profit
margin? Yes, of course I can sell it to you because the product belongs to me. Now, the customer can come back and tell the dealer Well, I'm not able to reach a negotiation with you I will not buy it with you call us now the ownership risk is with the dealer. So the dealer himself will be inclined to move towards an understanding of the customer. And that totally depends on the negotiation. Remember the negotiation cannot take place till the product belongs to the dealer. This is another important point which we need to make over here. It can't be that the dealer is acting as an agent first, doing all form form of dealings with you finalizing the contract and after finalizing the
contract with you. They go and buy the property in the name can't work out that way. First, get the property show your interest. Let the dealer know the dealer acquires property sits with you across the table SOC set out in sha Allah. I hope this is clear to all of you. I will be more than happy to take a question so insha Allah as soon as this video gets uploaded on YouTube, and Facebook, you can post in your views barakallahu li combs Salaam Alaikum warahmatullahi wabarakatuh