Islamic Finance
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Loan
Question
Is the financing known as “ Murahabah-financing” from the Al-Barakah bank from mauritius shariah compliant and if so, can we make use of this financing to purchase a plot of land?
Answer
Definition of Muraabahah financing
بسم الله الرحمن الرحيم
Muraabahah is a sale in which the seller discloses the original cost of an asset and sells it to the purchaser for that cost plus an agreed and known profit. In Islamic financing, the financier first purchases and takes ownership or possession of the asset required by the customer and then sells that asset to the customer at an agreed higher price, usually payable by instalments over a specified period.
One point that often causes confusion is the additional amount paid above the original cash cost. Some people automatically regard this difference as interest. This is not necessarily correct. In a genuine Muraabahah transaction, the additional amount represents an agreed profit arising from a sale, rather than interest charged on a loan.
For example, a seller may be prepared to sell a vehicle for Rs 800,000 if payment is made immediately, while agreeing to sell it for Rs 950,000 if the purchaser is allowed to pay over five years. Islamic jurisprudence generally permits a deferred sale price to be higher than the immediate cash price, provided that the parties choose and agree upon one final price at the time of concluding the sale, and all the other conditions of a valid sale are fulfilled. The essential distinction is that the increase forms part of the price of an asset being sold, whereas ribaa/interest occurs when an additional amount is stipulated over a debt or loan because of time.
As for Muraabahah financing offered by Al Barakah, based on the structure and information that we previously examined, we considered it permissible. Their current public information – al barakah website- continues to describe the product as Muraabahah or cost-plus financing, with repayment terms extending up to ten years, and states that there are no hidden charges or penalties.
However, this ruling remains subject to the important qualification mentioned above: if the contractual terms or actual operating procedures have changed, the current agreement should first be reviewed – by a sharia expert with knowledge in Islamic Finance- before the same ruling is applied to it.
Dr Hussein B Peerbaye
Department of Islamic Research
بسم الله الرحمن الرحيم
Muraabahah is a sale in which the seller discloses the original cost of an asset and sells it to the purchaser for that cost plus an agreed and known profit. In Islamic financing, the financier first purchases and takes ownership or possession of the asset required by the customer and then sells that asset to the customer at an agreed higher price, usually payable by instalments over a specified period.
One point that often causes confusion is the additional amount paid above the original cash cost. Some people automatically regard this difference as interest. This is not necessarily correct. In a genuine Muraabahah transaction, the additional amount represents an agreed profit arising from a sale, rather than interest charged on a loan.
For example, a seller may be prepared to sell a vehicle for Rs 800,000 if payment is made immediately, while agreeing to sell it for Rs 950,000 if the purchaser is allowed to pay over five years. Islamic jurisprudence generally permits a deferred sale price to be higher than the immediate cash price, provided that the parties choose and agree upon one final price at the time of concluding the sale, and all the other conditions of a valid sale are fulfilled. The essential distinction is that the increase forms part of the price of an asset being sold, whereas ribaa/interest occurs when an additional amount is stipulated over a debt or loan because of time.
As for Muraabahah financing offered by Al Barakah, based on the structure and information that we previously examined, we considered it permissible. Their current public information – al barakah website- continues to describe the product as Muraabahah or cost-plus financing, with repayment terms extending up to ten years, and states that there are no hidden charges or penalties.
However, this ruling remains subject to the important qualification mentioned above: if the contractual terms or actual operating procedures have changed, the current agreement should first be reviewed – by a sharia expert with knowledge in Islamic Finance- before the same ruling is applied to it.
Dr Hussein B Peerbaye
Department of Islamic Research