Question

Question 3: What are the main conditions of murabaha financing to be valid according to Islamic shariah. Under what conditions murabaha financing may turn into riba based transactions.

Answer 1

For a murabaha transaction to comply with Islamic shariah rules and principles, the following set of conditions must be strictly observed:

1. The seller should make the original acquisition cost known to the buyer.
2. The original purchase contract should be sahih (valid).
3. The seller should disclose the specific terms applicable to the purchase price (i.e., if the murabaha price will be paid at the contract date or in installments).
4. The seller should reveal all defects or faults that have occurred to the underlying item after acquisition.
5. In case the seller breaches any of the above stipulations, the buyer shall have the option to nullify the contract bilaterally, proceed with the sale in its current state, or have recourse to the seller for discrepancies.

A murabaha financing may turn into riba based transactions if:

1. there is no asset involved. A murabaha financing is a contract of sale as opposed to a contract of loan, whereas conventional interest-bearing loans have no requirement of an asset at the centre of the transaction.

2. the financier does not assume the risk of ownership of an asset. From the perspective of Islamic commercial jurisprudence, there must be clear evidence that legal title and possession of the asset (whether actual or constructive) are transferred to the financier before the financier sells it on to the customer. By owning the asset, even if for a split second, the financier is seen as assuming the risk associated with ownership of an asset.

3. there are penalties for defaults. Additional charges may not be imposed after a murabaha due date.

4. the total price payable is not fixed up front, but has some variable component (inflation or interest rate-dependent).

5. the financing can be rolled over to a later period.