FIQH MUAMALAT

📖 Chapter ▼
Chapter 5: Concept Of Contract Chapter 6: Sale-Based Transactions 1 Chapter 7: Sale-based Transactions 2 Chapter 8: Mudarabah Chapter 9: Musharakah Chapter 10a: Ijarah Chapter 10b: Rhan Contract Chapter 11a: Kafalah Chapter 11b: Wakalah Chapter 12: Bay al-Dayn Chapter 13a: Wadi'ah Contract Chapter 13b: Contract of Sarf
Table of Contents ▼

    Introduction to Sale-Based Contracts


    1. Concept of Murabahah
    Murabahah is a specific type of sale used widely in Islamic finance.
    • Literal Meaning: Derived from the Arabic word 'ribh', which means profit or gain.
    • Technical Definition: A sale where the seller purchases a commodity and sells it to the buyer at the acquisition price plus a stated profit.
    • Key Feature: It is a fiduciary sale where the seller must expressly disclose both the original cost and the profit margin.

    2. Classification of Sale-Based Contracts
    The material divides sales into two main categories based on whether the cost is disclosed:

    A. Normal Bargaining Sale (Bay’ al-musawamah)
    • The seller does not disclose the cost price or the profit made.
    • The price is reached through standard bargaining between parties.

    B. Fiduciary Sales (Buyu’ al-amanah)
    In these sales, the buyer relies entirely on the integrity of the seller regarding the disclosed cost. There are three sub-types:
    Contract Type Pricing Structure
    Bai’ al-murabahah Cost-plus profit: Sold at purchase price plus an agreed profit.
    Tawliyyah At cost: Resale at the original price with no profit or loss
    Wadiah Below cost: Resale at a discount from the original purchase price.

    3. Legal Authority for Murabahah
    • Al-Qur’an: Murabahah is permitted under the general permission of trade: "And Allah has permitted trade" (2:275).
    • Sunnah: It is supported by the Prophet’s (pbuh) migration to Madinah. When Abu Bakr (r.a.) offered a camel for free, the Prophet (pbuh) insisted on taking it at the acquisition price (tawliyyah). Scholars use this to justify selling at cost or with a mark-up.

    4. Summary of Key Terms
    • Cost Disclosure: A condition of validity; if the cost is not disclosed, the contract is voidable (fasid).
    • Mark-up: The profit must be agreed upon by both parties as it forms part of the final selling price.
    • Integrity: Because the buyer relies on the seller's honesty, the seller must also disclose any defects in the commodity

    Murabahah Principles and Applications


    1. Conditions of Murabahah
    For a Murabahah contract to be valid, several conditions of validity must be met:
    • Cost Disclosure: The original cost price must be disclosed to the buyer. If it is not disclosed, the contract is voidable (fasid).
    • Profit Disclosure: The mark-up or profit must be agreed upon and disclosed, as it is part of the final selling price.
    • Commodity Integrity: The item must be free from defects; if any exist, the seller must inform the buyer.
    • No Ribawi Properties: Murabahah is not allowed for ribawi properties (like rice for rice) where exchanges must be equal and immediate.
    • Valid Acquisition: The seller must have acquired the item through a valid initial contract.

    2. Types of Murabahah Applications

    • Ordinary Murabahah Sale: A trader buys a commodity and then offers it for sale at cost plus profit. This is less common because traders usually don't disclose their costs.
    • Murabahah to the Purchase Orderer (MPO): Widely used by Islamic banks. The bank buys a specific item based on a customer's request and sells it to them at a profit with deferred payment.

    3. Practical Steps for Bank Murabahah (MPO)
    When a bank finances an item for a client, it typically follows these five steps:
    • Step 1: Master Agreement: The client and the bank sign an agreement where the client promises to buy the commodity at a specific profit ratio.
    • Step 2: Agency Appointment: The bank appoints the client as its agent to buy the commodity on the bank's behalf.
    • Step 3: Purchase & Possession: The client buys the item from the supplier as the bank’s agent. The bank now owns the item and bears the risk.
    • Step 4: Offer to Purchase: The client informs the bank that the item is bought and makes an official offer to buy it from the bank.
    • Step 5: Sale Conclusion: The bank accepts the offer, ownership transfers to the client, and the client becomes a debtor to the bank.

    4. Key Financial Terms

    • Hamish Jiddiyyah: A security deposit paid by the client to prove they are serious about the order. If the client backs out, the bank only deducts the actual loss incurred.
    • Urbun: An alternative deposit where the seller keeps the full amount if the buyer cancels, regardless of the actual damage.

    Contemporary Issues in Murabahah


    1. Using LIBOR as a Benchmark
    Islamic banks often use the LIBOR (London Interbank Offered Rate) to determine their profit margins.
    • Validity: Using an interest-based rate as a benchmark does not make the transaction haram or invalid.
    • Reasoning: The deal itself is a sale, not a loan, and does not contain interest; the rate is merely used as an indicator for pricing.

    2. The Binding Promise (Wa'd)
    To ensure business stability, banks require a unilateral promise from the client to buy the item.
    • The Risk: If a bank buys an item and the client withdraws, the bank faces a huge loss.
    • Legal Status: While fulfilling a promise is generally a moral duty, the Islamic Fiqh Academy rules it is binding in commercial dealings if the bank has already incurred liabilities.
    • Damages: If a client backs out, they must pay actual monetary loss, but not "opportunity cost" (lost potential profit).

    3. Late Payment & Default
    If a client fails to pay on time, the bank cannot simply increase the price, as this would be riba.
    • Malaysia Practice: Banks can charge 1% of the outstanding amount or the actual loss as compensation. This is a one-time charge and cannot be compounded.
    • Middle East Practice: Clients agree to pay a specific amount to a charitable fund maintained by the bank if they default.

    4. Rebate on Early Payment (Da’ wa taajjal)
    Can a client get a discount for paying their debt early?
    • General Rule: The majority of jurists do not allow a rebate if it is a pre-agreed condition in the contract.
    • Voluntary Rebate: If the bank chooses to give a discount voluntarily without being forced by the contract, it is permissible.

    5. Rescheduling and Securitization
    • Rescheduling: If a client cannot pay, the bank may reschedule. However, unlike conventional banks, they cannot add additional charges or interest. The original price must remain the same.
    • Securitization: Murabahah debts generally cannot be securitized (turned into tradable bonds/sukuk) because they represent monetary debt, which must be sold at par value.
    • Exception: It can only be securitized if it is part of a mixed portfolio containing other assets like leasing or partnership (Musharakah).

    Inah and Tawarruq


    1. Bay’ al-Inah (Double Sale)

    Inah is a transaction used to obtain immediate cash through a "back-and-forth" sale. 
    • Process: A person buys an item from a seller on credit (high price) and then immediately sells it back to the same seller for cash (lower price). 
    • Result: The "buyer" gets cash immediately but owes a larger amount later; the item ends up back with the original owner. 

    Legality:
    • Prohibited: Malik and Ahmad Ibn Hanbal prohibit it because it is seen as a trick (hilah) to circumvent the prohibition on riba (interest). 
    • Permitted (with conditions): Al-Shafie and Abu Hanifa focus on the validity of the contract's form rather than the hidden intention, unless the intent to commit usury is explicitly declared. 


    2. Tawarruq (Monetization)

    Tawarruq (from wariq, meaning silver) is another way to obtain liquidity but involves a third party. 
    • Process: A person buys an item on credit from Seller A and then sells it to Buyer B (a third party) for cash. 
    • Key Condition: The item must not return to the original seller. 

    Types:
    • Fiqhi Tawarruq: A three-party arrangement where the client sells the commodity on their own. 
    • Regulated Tawarruq: A four-party arrangement where the bank acts as an agent to sell the commodity for the client; common in modern Islamic banking. 


    3. Comparison: Tawarruq vs. Inah
    The presence of a third party is the "vital condition" that distinguishes the two.
    Feature Bay’ al-Inah Tawarruq
    Parties Involved Two parties (Buyer and Seller). At least three parties (Seller, Buyer, and Third Party). 
    Movement of Item Returns to the original seller.  Sold to an independent third party. 
    Shariah View Widely prohibited as a trick for riba Generally permitted if conditions are met, as it is a form of trade. 

    4. Arguments for and against Regulated Tawarruq

    Arguments FOR:
    • It falls under the general permission of trade in the Qur’an (2:275). 
    • It fulfills a genuine necessity for liquidity when interest-free loans are unavailable. 

    Arguments AGAINST:
    • Some argue it is just a "organized" version of inah and still leads to riba. 
    • Critics claim the commodity is often just a "mere document" or certificate rather than a real trade.
     

    Bay’ Bithaman Ajil (BBA)


    1. What is BBA?

    Bay’ Bithaman Ajil (BBA) is not a specific type of sale, but rather a manner of payment.
    • It refers to a sale contract where the payment is deferred (delayed) and paid at a specific future time.
    • Payments can be made as a lump sum or through installments.
    • It is widely used for medium-to-long-term financing for assets like houses, land, motor vehicles, and shares.

    2. Legal Authority and Pricing
    A major point of discussion in BBA is the increase in price due to deferment.
    • General Rule: The majority of jurists allow increasing the price if payment is delayed.
    • Justification: The increase is permitted because it is against the commodity (the house or car), not against a money loan.
    • Scholarly Views: Famous jurists like Al-Kasani and Al-Nawawi stated that "time has been given a share in the price".

    3. Practical Application in Property Financing
    In Malaysia, BBA property financing typically involves three main agreements:
    • Sale and Purchase Agreement (SPA): Signed between the Client and Developer. The client pays a 10% deposit to acquire "beneficial ownership".
    • Property Purchase Agreement (PPA): The Bank purchases the property from the client (usually for the remaining 90% of the price).
    • Property Sale Agreement (PSA): The Bank sells back the property to the client at a higher price (Cost + Bank's profit) to be paid in installments over many years

    4. Shariah Issues and Criticisms
    Despite its popularity, BBA faces several criticisms:
    • Two Sales in One: Critics argue it might violate the Hadith prohibiting "two sales in one," though proponents argue that only one final price is settled upon during the actual contract.
    • Inah Replication: Some see the PPA and PSA steps as a replication of Inah, where the bank buys and sells back the same item just to generate a profit margin.
    • Non-existent Assets: Issues arise when BBA is used for houses that are not yet constructed (selling a non-existent asset).
    • Ownership: Often, only beneficial ownership is transferred rather than full legal ownership, which some argue contradicts normal sale principles

    Comparison of Key Sale-Based Transaction

    Feature Murabahah Tawarruq Bay’ Bithaman Ajil (BBA)
    Primary Purpose Asset acquisition/financing Obtaining immediate cash/liquidity. Medium-to-long-term asset financing.
    Number of Parties Usually 2 (Ordinary) or 3 (Bank, Client, Supplier) . Usually 3 (Fiqhi) or 4 (Regulated). Usually 3 (Client, Bank, Developer/Seller).
    Pricing Structure Cost price + stated profit must be disclosed. Initial credit purchase at higher price, followed by cash sale at lower price. Actual cost + bank's profit margin .
    Payment Terms Often involves deferred payment. Initial purchase is deferred; second sale is cash. Always on a deferred payment basis (installments or lump sum).
    Key Condition Exact cost and profit must be known to both parties . Asset must not return to the original seller (unlike Inah). Price increase is permitted because it is against the commodity, not a loan.
    Common Uses Working capital, equipment, or goods purchase. Personal financing and bank liquidity needs. Houses, land, motor vehicles, and shop houses.