Yasir Qadhi – What is Murabaha, Mudarabah, & Musharakah – Islamic Finance – Ask Shaykh YQ #197

			The first question comes from Abu Dhabi. Our brother Farah set, he says that he's been looking into
Islamic finance. And he says that can I explain in simple terms he has this point underline. can I
explain in simple terms, the concepts of murabaha and musharaka. And we'll learn about and also can
I recommend some books on modern Islamic finance in the English language? So these are simple
questions a shout out to either so let us begin
		

			107 mean Kobe league in Region Jalan No Hey la him first.
		

			Lake Erie.
		

			Now, as I've said multiple times that I have never claimed nor do I view myself as a specialist in
Islamic modern Islamic economics, I'm just a minor student of knowledge when it comes to the field
of modern finance. And I always whenever I talk about finance, I give you the opinions and positions
of roadmap for greater authorities in this in this field in the contemporary issues of Finance.
However, this question is an easy one, because it deals with the classical definitions. Apparently,
our brother wants to know how to how do we understand these terms, so that when we open up the books
of faith, or the modern Islamic finance texts, that these terms can then be understandable. So
		

			inshallah, what I'm going to do is present these concepts is very simple language with illustrations
that inshallah will be useful for the beginning student of knowledge. And of course, as I've said,
again, multiple times that modern Islamic economics and the Fatah was related to it is a very, very
interesting enterprise of how classical physics connects with modern physics, and why and how it is
necessary for some areas, not all, but for some areas that we rethink through because our modern
economic system is so radically different from the way that bartering occurred 1000 years ago, that
you cannot open up any book of early Islamic law for the first 300 for the first 1300 years, and
		

			then expect to understand our modern day transactions, you have to extrapolate you have to rethink
through and so these terms modaraba and musharaka and murabaha. These are terms that are found in
early Islamic law that are now being used quite a lot when it comes to the issue of modern finance.
		

			And because of this, it is important that we understand the classical issues. So let us begin with
the first term murabaha murabaha from the root rubber which means to profit which means to make a
profit river in the Arabic language means your profit. So if I purchase this water for $10, and I
sell it for $15, my river my profit is $5. So murabaha is the active engagement of making a profit
and what murabaha entails is an offer to buy merchandise at a set amount of profit, you make an
offer to purchase a person's merchandise and you state in the offer that I'm going to give you such
and such a profit however you must your cost was however much you spent on the initial investment I
		

			will give you such and such a profit a very simple example suppose I have come back from a faraway
land and I have imported this product Okay, I say this is a product that I have purchased from a
faraway land and I've come back to my home country and I purchased it once again let's say for $10
Okay, now generally speaking, if you walk into a store, and I have this item on display, you will
not know the cost I'm going to advertise it for $15 let's say and it's up to you to buy or to not to
buy the difference in murabaha is that you know the cost of the item and you then add on to it you
tack on to it the buyer not the seller, the buyer tax on the profit and says I will give you a
		

			profit of 10% or of $10 for every bottle whatever it might be, you tap on the profit and you make an
offer to buy based upon a specific profit amount and this transaction so for example, I come and
tell you I purchased this bottle of water from Michelle that is from France this one okay. This
bottle of water for let's just say $10 okay and I come back to America and you walk into my house or
my merchandise store whatever and you know and I have said that this bottle is $10 and you say okay,
I will buy all of your water bottles that you purchase for $10 I will buy it and give you a profit
of $2 each. So you will you will be getting $12 for every 10 or $3 or I'll pay double doesn't matter
		

			how much profit
		

			To put on this is called murabaha. So murabaha is an offer to purchase merchandise with a known
amount or percentage of profit, you can do either amount to a percentage amount means I'll give you
$2. For every bottle more or percentage, I'll give you 20%. For every bottle more, this type of
transaction is permitted by unanimous consensus of all the scholars of Islam, there is no problem
whatsoever, because this is what would be the problem. You everybody makes a profit, you know, when
I when you sell something, that's the everybody desires to make a profit. And if you yourself, offer
the profit amount you yourself, say, I'm going to purchase this for, you know, $2 profit or 20%
		

			profit. Why would that make it How long? They've been Kodama, and his money says that this type of
transaction murabaha, this is john is permissible, and there is no controversy over its
impermissibility. In fact, he says, I don't know if anybody who even said it is disliked whoever
said it is mcru. And so this is a completely permissible purchase. Now, obviously, the concept of
murabaha has nothing to do with Riba because you're not taking a loan in the first place. I am
selling you merchandise, and you come and I own the merchandise and you come and you make an offer
to purchase the merchandise. Now Riba would be I give you the money, and then you pay back more
		

			money. That's a totally different concept. And of course, there is no similarity between a real
murabaha alone and between an interest Sorry, I'm Robert transaction, and between an interest based
loan, now you can also purchase in installments by unanimous consensus, there's no problem. If I
were to say, Hey, I'm selling this bottle for $15 and I purchased it for 10 you say, Okay, I don't
have 15 but can I pay $5 every month, so you will pay 555 no problem, this is completely
permissible. And if you offer me the the payment in installments, and you offer me the profit, that
too is completely permissible. So this is a bottle for $10 you know, it's $10 you walk into my
		

			store, we're friends, we're acquaintances, or however reason you know, it's $10 and you say, Okay,
I'm going to purchase this bottle for 15. And I'll pay you in installments $5 every month, this is
the essence of murabaha there is no problem whatsoever. So this is morava. Now, why is murabaha
interesting in Islamic Finance and modern Islamic Finance, and in purchasing houses and cars and
whatnot? Well, because now we get to the whole issue of the gray area. Today's lecture is not about
modern Islamic Finance, I'm just going to link a little bit so you understand I have given a much
longer conversation with Dr. Hatem al Hajj, you can find this on our YouTube channel, just google it
		

			myself in his name, and his modern Islamic financial transactions have also spoken to Dr. Akram
nadwi, about modern Islamic Finance and and these so called mortgage loans and whatnot. So you can
listen to those lectures for more information, nonetheless, a brief a brief introduction to this
that why is murabaha mentioned when it comes to Islamic Finance and houses. And that is because that
some banks, they offer a type of transaction that is a modified model, but it's not the classical
model, but they add some conditions and this is where the gray area comes. Now the modern Islamic
financial transactions that banks do, they try to make it obviously more user friendly, and they try
		

			to make it more pertinent to the culture that we live in. And sometimes the conditions that they add
are considered problematic. For example, some scholars very small group of scholars will
problematize the fact that you go to somebody and you tell them to purchase when they had no desire
to purchase this is the first issue so suppose I don't have this bottle of water, but I can afford
it. I am the person who has $10 you don't have $10 but you want to this bottle of water. What if you
were to come to me and you were to say to me, Hey, can you go to purchase this water and I will pay
you more about how long I'll give you a profit of 10 20% I promise you I'll give you the profit and
		

			I'll pay it in installments. Right and so the bank will go purchase the house or the car the bank
had no desire to purchase the house or car it will purchase the house or car for let's say 100,000
and it'll then you have said I promise you I'm gonna make a 15% you know profit for your house or
purchase so then you sell it 115,000 and you sell it in installments every month is gonna pay 2000
until the entire house is paid off. This is called that this this transaction is called by El Mirage
by Al murabaha Mary B Shira Bayer al murabaha de Lille MIDI beshara it the concept of murabaha but
now somebody is commanding you to buy the merchandise and you didn't have the intention to buy it.
		

			Now. This is again
		

			Here's where we're adding, we're making a classical concept tried to fit to our understandings of
how the modern world works. And in and of itself, there's nothing wrong with that. But again, the
issue comes to what level can you add conditions, the vast majority of modern Islamic finance
experts have said that this, this type of transaction is permissible with some conditions. And of
those conditions is that the bank or the middleman or the rich person actually owns the merchandise
and acquires the merchandise and puts it in his name, and then sells it on to you. So it's not just
going to be a paper transaction that this bottle of water remains where it is, and the ownership is
		

			transferred from the first owner to the third person. And the middleman is simply just giving the
money and taking the money and what not, because then it becomes very fishy. However, if the
middleman even if he's told to buy it, if he says, Okay, now it's my water water bottle, you know
what, I have the right to change my mind, even if you told me to buy it? Well, that's your request.
Now that I own it, suppose I want to sell it to somebody else, I have that right. Or I can sell it
to you based upon our verbal agreement. All of this is something that makes certain problematic
areas less problematic, ie the fact that you own the property or you own the water bottle in the
		

			middle, and then you then have a second transaction to sell, it makes it much easier than if there
was simply just a paper transfer from the first to the last. Also, of course, one of the biggest
issues is that there should be no penalties on late repayment. And that is something that of course,
we don't believe in late penalty. So again, you can look up the different photographers and
different conditions that are put, but this is what murabaha is, and conceptually speaking, pretty
much all of the fifth councils of the modern world, and all of the modern Islamic finance experts
have said, if the person goes to a middleman and asks him to purchase with the verbal agreement, or
		

			even the written agreement that I'm going to purchase based upon a profit as long as the middleman
party actually acquires, and then there's no how long conditions and clauses and then they give the
merchandise at the agreed profit in installments, that would be a permissible transaction will allow
you to add an item. Of course, in reality, banks add so many conditions and clauses to such murabaha
loans, and this is where Islamic banks This is where the problem comes. So we're not going to go
over there. As I said, As for musharaka moussaka is a very broad concept. And it basically means a
partnership, a financial partnership. So just like the word should partner with Allah Shetty is a
		

			partner, right. So musharaka is a business partner from the same concept of shoe which is a creator,
creating a partner for Allah subhanho wa Taala. So the concept of shooting is to have any partner
shot aka Shetty, Shetty means your partner. So musharaka is a financial partnership, where two or
more people come together, and they all invest in a project. And they then share the profit and the
loss of the project. And again, no problem whatsoever. This is how the world works this the
beginning of time, and will continue to work, you want to, let's say, make a building and sell it
for a profit, but you can't afford to make a building on your own, you cannot afford to buy the
		

			land, you come together with 10 of your friends. And you say, Okay, let's all put together 50,000.
And then we have 500,000, we will purchase this plot 450 200 we're going to you know, build a house
for you know, 300 something dollars, then we'll sell it for six $700,000. So the we pool together,
we got $500,000, we made the project, we did it, now we're going to sell the house, and then we're
going to make a profit off of it. This is called Michelle Raka. And it's very straightforward.
Conceptually speaking, obviously, you can have infinite types of partnerships. What percentage is
how many people to what percent each person is required to invest? What are the rights and
		

			privileges of every single partner because you don't have to share the exact same rights and
privileges? What are the percentage profits? And can you get more profit than your initial
investment? So for example, if somebody invested 30%, and other person invested 70%, must the
profits and losses be shared at 30? And 70? Or can they renegotiate because one of the partners is
more involved with the project than the other? These are all, you know, questions that our fuqaha
have discussed. But the concept of musharaka is something that there should be no controversy over
and there is no controversy theoretically the concept of musharaka ie multiple people coming
		

			together and forming a business venture ship or partnering or should say on a business venture ship.
This is called Michel Raka. And it becomes problematic once again, when you start adding many
conditions. And the person who's basically the in this case, the financial institution, the bank is
adding so many conditions that essentially they're almost guaranteed or perhaps they are absolutely
guaranteed to never make a
		

			loss in which case there is no question that anytime you have a business partnership in which there
is the potential for loss for one side and not the potential for loss for the other, there is no
question that that entire enterprise is extremely shaky if not outright forbidden. Because there is
a principle in Islamic law alone mobile home to me that when there is a chance for having a profit,
there must also be a chance for having a loss, there cannot be guaranteed profit for any of the
investors or else you are your work, you are walking into a land field of interest, that point of
interest. The reason why Riba is how long is because the rich are guaranteed to get richer, and the
		

			Shetty does not allow that to happen. When people come together for a partnership, the goal and
desire is for profit, but there should be a risk of loss. And that risk of loss, here's the key
point must be shared, not necessarily equally, the one who invest 10% is not going to be like the
one who invest 90%. But even the 10% person, there must be the percentage of loss, it could be 10%,
it could be less or more depending on the agreement. But the problem comes again, when the third
party in this case, the Islamic banks or whatnot, they add so many conditions that sometimes it
becomes basically a guarantee almost so how does it work? Again, I'm being very simplistic here.
		

			Again, this is not a lecture on modern Islamic Finance, but our brother wanted the basics, the
summary that much inshallah we can do in this lecture. So how do Islamic banks function on the
musharaka model, so the bank and the buyer of the house will enter into a modified musharaka where
they will both purchase the house 5% is owned by the person 95% by the bank, because the person gave
only 5000, the bank gave 95,000, let's say houses 100,000. So the bank owns 95%, and the person owns
5%. Okay, technically, that's allowed no problem. But then the bank puts the condition that you must
purchase my 95% share, okay, that too is not a problem, you can have that condition, but then the
		

			bank puts another condition. But in the meantime, I own 95%. So you need to pay me rent on that. And
so what ends up happening and again, this is to have a diminished musharaka ultimate alpha i want to
hear but Tim League, you have a diminishing partnership over time. That end result is that you
continue to increase your percentage ownership, and eventually the bank becomes 0% owner and you
become one 100% owner. This is called diminished partnership that ends in complete ownership of the
house. This is one of the most common mechanisms of the modern Islamic banks when it comes to
Islamic financing. And again, some scholars allow it Some scholars don't allow it and again, why and
		

			what not is besides besides the point of this, however, theoretically musharaka is a very simple
contract, and there should be no problem. The problem comes when you keep on putting conditions such
that one of the parties in this case, the Islamic bank, is pretty much guaranteed in some cases to
make a profit. And any time the bank is guaranteed to make a profit and you are not guaranteed to
make a profit you can become a loss or whatnot. This is really pretty much open shut case that in
such scenarios, the bank is basically co opting a mechanism of Riba you need to be careful for that.
But again, I'm not speaking about every single contract, there are some Mashallah contracts with
		

			Islamic banks that there is much more leeway, and they're much better and they have conditions that
are reasonable. So again, this is not a topic on the modern finance. If you wanted to know more
sciatica, I told you what is musharaka and the third term you asked about your brother who lost his
mobile robba mudaraba.
		

			And in fact, modaraba is a type of partnership is a type of musharaka. And it's actually very, very
simple to understand modaraba is a musharaka in which one of the partners has the money and the
others has this skill sets Simple as that. So rather than every partner coming with money, which is
basically the common mushara Cup, if one partner has money, and the other partner has a skill set,
and the two come together to form a cooperation a business venture, and they agree to share in the
profits and in the loss agree to the percentages. It doesn't have to be 5050 it could be
9010 7030 6040 however they want to decide is a mutually agreed upon partnership. So for example,
		

			suppose that a person is a handyman he's a carpenter, and he wants to open a shop to do his
carpentry but he doesn't have the money for a shop. So rich investor comes in and says you know
what, I like you, you're a nice guy, you're an honest guy. And I like your quality of work. I will
find that's the shop, you will do the manual labor and the money that is generated, we split it you
know 5050 6040 7030 9010 whatever they agree to this is bovada suppose somebody has Mashallah
cooking skills chef and nice chef and an investor says you know what, your your skill
		

			Rules are so good. You should open a restaurant and the person says I don't have money for a
restaurant. No worries, I will give you the restaurant, I'm going to finance it. I'm going to do
everything. You are going to be the chef and whatnot. And then you bring in your sweat and labor,
I'll bring in the finances and then this is the contract you must have the contract you agreed
percentages, who was going to do what all of this must be agreed upon before you enter into emulator
but in fact, again, by unanimous consensus, no problems there is no again, Machado can well the all
of these are conceptually No problem, how you interpret them in the modern world by adding all of
		

			these conditions where is where it becomes a gray area. You know, our Prophet Muhammad sallallahu
alayhi wa sallam was involved in a move out of a contract, you're all aware of it. He was before he
got married, what did he do? called the DJ de la vida. She approached the Prophet sallallahu Sallam
and she said, I'm looking for a business partner. I'm looking for somebody who's going to take my
caravan to Villa to Sham and manage and barter and negotiate and make a profit. And that person some
some reports, they keep a third and I'll take two thirds Okay, so this is modal, but this is exactly
what modaraba is. Our Prophet sallallahu alayhi wa sallam and Khadija Khadija has the wealth. Our
		

			Profit System has the honesty and the skill set and bartering and negotiating. So how deja gave the
wealth to the Profit System the profits of one two without the Sham, and he bartered negotiate, he
came back with a massive amount of profit, he gave the percentage of deja, he took the percentage
guaranteed to him, and Khadija was so impressed at his honesty and his bashfulness and whatnot. The
rest as they say is history and the concept of modaraba. Again, there is no difference of opinion by
Juma it is allowed, as long as one side gives a known amount, the other side does the specified job.
And the profits are split. According to an agreed upon percentage between them, you cannot split
		

			profits by a number in this case, mudaraba. You cannot say $100. Because you do not know if you say
$100 you're paying him a wage. If you say $100 a day, that's a salary that's not well thought of it
that Oh, that's a different type of contract. Well Baba is you are sharing the profit and loss. And
you're sharing based upon percentages, and each party comes to the table, one with the money and the
other with deep skills. And again, when I say one doesn't have to be one, it can be 10 people, five
of them with money and fire them with skill sets. The point is that modaraba is that type of
contract where not everybody is bringing money, and there must be unknown percentage unknown amount
		

			to work everything, there cannot be any unreasonable unknown. However, once again,
		

			what happens once again, is that in our times, sometimes conditions are placed that basically make
it an interest loan. So for example, the bank says to the chef, that, okay, if you make a profit,
we're gonna get, you know, 70% of the profit. However, if you make a loss, then you must pay us
back, we invested 100,000, you must pay us back 100,000. For example, just giving a hypothetical
example, if the bank puts this condition, it is not well thought of it is an interest loan, because
you cannot place a condition that you're guaranteed to get your money back. The point is, and this
is the whole difference of the philosophy between Islamic Finance and between the modern financial
		

			world Islamic Finance, because there is a chance of loss, you are going to raise the bar of critical
thinking and of making sure you're getting with the right person, you are going to do your research
and due diligence. If you have the money, and you are looking for somebody to make some profit,
you're going to make sure you find the right person, the honest person, and then you will face the
consequences if you made a mistake. However, banks, they don't care they want they don't care if you
have bad credit, no credit, they waiting even want you to fail, because they're going to confiscate
their good, you're going to go on the street, they're guaranteed their money. And by the way, you
		

			know, the whole 2008 crash and complex that the whole industry that crashed here in America is
because of this issue, that the banks knew that they're giving loans to people who could not pay
them back. And they didn't care, because from their perspective, they're going to get rich off of
that. And you know, the system is a massive Ponzi scheme. But I don't want to go there. Let's stop
there right now, point being that you cannot, you know, play with economics in this fashion without
getting blowback. And that's what happened in 2008. In the Islamic Sharia, you do not enter into
such such types of transactions where there is a guaranteed profit. On the contrary, there must be a
		

			genuine risk. And so if you invest 100,000, in a good, you know, qualified Carpenter or a chef or
whatever, and for whatever reason, his carpentry doesn't sell, you know what the both of you are
going to have a loss, he's going to lose all of his time and effort, you're going to lose your money
or a portion of your money. That's the loss that happens. That's the whole point here and that's why
such a transaction becomes highlighted. Anytime you eliminate the risk and eliminate the chance of
loss to one party and not to the other. Then you are walking in to the
		

			Room of Riba of interest and that is not something that our shut up allows. So to conclude here, and
as I said, by the way, you can use this as a litmus test. Anytime you have a partnership, a group of
people in which the more powerful and the one that's basically the the elephant in the room, let's
say other, this 800 pound gorilla, as they say, right, any time, you have a partnership in which one
person typically the most powerful one is guaranteeing that they're never going to make a loss, and
others have a chance of making a loss, then take this as a litmus test, that what you're looking at
is not a business partnership, it is in fact a mechanism a healer to overcome something that is held
		

			on and to try to make the how I'm headed. And that is a type of Riba, there must be a genuine, a
genuine risk of loss upon all parties not all the same. For example, if somebody invested 90%, and
the other person invested 5%, the loss is going to be different, the 5% is going to lose less, but
there must be the chance of loss. So well, Baba is the business transaction in which one person
brings skill set and the other person or the other partners bring the money. To conclude this first
question, what we see about modern Islamic finance is that they take these models that are found in
our rich heritage. And they understand that these models, they need to be modified conditions needed
		

			to be added, you know, the context needs to be refined, and they then present them to the end user.
And in this process of refining and adding conditions, which overall is what fifth is all about
contextualization. And looking at your circumstance, some of our scholars allow some things other
scholars do not allow them. And this is where the gray area becomes. So you can find out more about
that by, you know, listening to lectures on modern Islamic finance. And you go to the experts for
that. The brother also asked for a book list, I would recommend three books and I don't it doesn't
mean I'm endorsing every single paragraph of these books, but you wanted a book list of where to
		

			begin. So I'll give you the first book by one of the most authoritative references on modern Islamic
finance. I have skimmed through this book and benefited immensely from it. It is called an
introduction to Islamic finance by Mufti duck the earth money. An Introduction to Islamic finance by
Mufti chocolatier with money moves up the earth money is one of the world renowned specialists in
Islamic finance. He is from Pakistan. And his father was the Grand Mufti of Pakistan as well. And so
and this book has been translated to English and you will find it on Amazon. So this is definitely a
book that I encourage you to read if you're interested in modern Islamic Finance, another one
		

			actually written by a non Muslim, but I found it to be very simple and very user friendly, and it's
something that non specialists will benefit from and he's simply gathering together the simple
facts. It is called Islamic finance in a nutshell, a guide for non specialists Islamic finance in a
nutshell, a guide for non specialists by Brian kettle K, TT e. l, Brian kettle, Islamic Finance, in
a nutshell, a guide for non specialists. If you want something a little bit more in depth and a
little bit more specialist, then one book that I can recommend over and again doesn't mean I agree
with everything And who am I to disagree, I'm simply saying this is one of the authoritative
		

			references. It is an edited volume by thought deewani edited so he has a whole bunch of different
articles in different chapters from different authors. And it is called Islamic banking and finance.
And this is more of a in depth work. So this is not something I'd recommend for the first user
initial user rather, if you've read some basic books or you have a background in finance and you
know classical or basically mainstream finance then you go to the more advanced spoken this is one
of them Islamic banking and finance by thought of as the one you know, again, there are many many
books out there I don't mean to discourage you from other books, but you asked me my opinion and
		

			these are books that I have some experiences especially the first one mostly adoptees is a standard
introduction to the topic and Allah subhana wa tada knows best