One of the more 'interesting' financial concepts used in Islamic finance has to be 'Bai Bithaman Aajil' or 'Bai Muajjal'. In some areas, it's being called 'Murabaha' as well, though I always felt the two were somewhat different.
Let me explain Murabaha.
Forget about banks & bank loans for now but think of a businessman. A customer goes to the businessman & asks for an item. The businessman buys the item & sells it at a cost price plus a profit margin to the customer who then pays on the spot. In a nutshell, this is Murabaha.
The ever-popular concept, BBA or Bai Muajjal, is a variation of Murabaha. The difference being that BBA or Bai Muajjal involves payment to the businessman on a later date, whether it is in installments or a big lump sum. This concept is very popular that around 80 to 90-ish % of a typical Islamic banks' practice revolves around this for the main reason that it provides a financing avenue for Islamic banks.
Justice Taqi Usmani in his article/book mentions that Murabaha can be used as a financing mode but it must follow certain steps. There's more details in the relevant website (See #6 & 7) but the gist of it are as follows:
Step 3: The customer purchases the item & takes the item as an agent of the bank.
Step 4: The customer informs the bank the item is with him & makes an offer to buy it from the bank.
Step 5: The bank agrees, accepts the offer & the ownership of the item and the risk of having the item is transferred to the customer.
Among other things, one of the important bits here is that the ownership risks are with the bank between step 3 & 5. If anything goes wrong with the item, say a fire at the warehouse, then the bank is liable.
Things to ponder:
Till next time.
Let me explain Murabaha.
Forget about banks & bank loans for now but think of a businessman. A customer goes to the businessman & asks for an item. The businessman buys the item & sells it at a cost price plus a profit margin to the customer who then pays on the spot. In a nutshell, this is Murabaha.
The ever-popular concept, BBA or Bai Muajjal, is a variation of Murabaha. The difference being that BBA or Bai Muajjal involves payment to the businessman on a later date, whether it is in installments or a big lump sum. This concept is very popular that around 80 to 90-ish % of a typical Islamic banks' practice revolves around this for the main reason that it provides a financing avenue for Islamic banks.
Justice Taqi Usmani in his article/book mentions that Murabaha can be used as a financing mode but it must follow certain steps. There's more details in the relevant website (See #6 & 7) but the gist of it are as follows:
Step 1: Begins with an overall agreement between the bank & customer.
- Important: Murabaha can only be used to actually buy some item & not a way to give out a loan. There must be a genuine sale & purchase of items.
Step 3: The customer purchases the item & takes the item as an agent of the bank.
Step 4: The customer informs the bank the item is with him & makes an offer to buy it from the bank.
Step 5: The bank agrees, accepts the offer & the ownership of the item and the risk of having the item is transferred to the customer.
Among other things, one of the important bits here is that the ownership risks are with the bank between step 3 & 5. If anything goes wrong with the item, say a fire at the warehouse, then the bank is liable.
Things to ponder:
- In the shrinking global network & with the use of IT, ownership risk can be minimized in a matter of minutes. The question that I pose is how fair & justified is the actual profit rates charged by Islamic banks?
- How many Islamic banks do practice the 'appropriate' way of using BBA/ Murabaha?
- How can we move further away from the current practice of BBA/ Murabaha into something truly & distinctively Islamic? Can we?
Till next time.
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