I am currently pursuing academic studies in the field of finance, this has led me to seeking information on Islamic Financing particularly Murabaha since I have seen its popularity throughout the world. My understanding of the financing method is based on one party eg. a bank buying an item and reselling it to another party eg. the client based on an agreed markup or profit. My question is regarding the determination of the profit / markup and selling price and it is what follows :-
Based on your knowledge and understanding is it permissible to calculate the markup / profit and therefore selling price based on the length of time to repay (eg. cost of item multiplied by markup rate multiplied by time either 1, 2, 3 years etc.)
Or should the markup / profit and therefore selling price be one determined amount regardless of whether it is being repaid in 1,2,3 years etc.
I look forward to your response
Wa Alaikum As salaam,
In Murabaha, when determining the selling price, the bank (or Islamic Financial Institution) may take the time of payment (by the client) into consideration. So, the longer the time taken, the higher the mark up can be. However, when the selling price is fixed, and agreed to, by both the bank and the client, no changes in the price can be made afterwards. Therefore, whether the client pays earlier or later, the price will not decrease or increase. Default in payments by the client will not cause an increase in the price, nor would the price keep on increasing with the longer duration taken by the client. All these will be Riba (interest/usury).
In Islam, the sale of a commodity is treated differently from the sale of money. Both are not on the same level. Hence, when money is exchanged for money, no excess is allowed, neither in cash transaction, nor in credit. However, when a commodity is sold for money, the price agreed upon by the parties may be higher than the market price, both in cash and credit transactions. Just as the bank (or Financial Institution) may use various reasons to fix a markup and selling price, the time of payment may also be used as a reason. This however, may only act as ancillary factor to determine the selling price of the commodity.
As mentioned before, when the selling price has been fixed by the bank, then this becomes the total price of the commodity. Hence, it must be charged on a one time basis only. If the client fails to pay on time, the bank cannot charge any additional amount. The price will remain the same without any addition. If the bank imposes a condition that in the case of late payment, it will charge 7% per annum as a penalty, then this will be totally prohibited because what is being charged is not a part of the price, but it is an interest charged on a debt. (See An Introduction to Islamic Finance by Mufti Taqi Usmani pgs.114-118)
And Allah knows best,
Mufti Waseem Khan