> Islamic Finance: Different characteristics of money and commodities

[Assad]

Islamic Finance: Different characteristics of money and commodities

By Sohail Zubairi,
Special to Gulf NewsPublished: 00:00 March 17, 2004

Being a popular Islamic financing tool, Murabaha remains a subject of debate with respect to its being fully Sharia-compliant. It is, therefore, important that we discuss common misconceptions about Murabaha in order to clarify that this product does not violate any Sharia principle.

A major argument encountered by an Islamic banker is why does the bank demand different prices for sale against cash and the disposal of goods on a deferred payment basis under Murabaha.

An Islamic bank deals in goods under Murabaha in different ways. In case of establishing a sight letter of credit on the customer's behalf, the goods on receipt can be sold to the customer against a cash down payment which includes the usual tariffs such as commission, exchange difference, postage/telex charges, etc., besides the cost of the goods.

The bank can also allow the customer to settle the amount at an agreed time. The price of goods under Murabaha, where the customer is allowed deferred payment terms, is always higher than when he purchases against cash.

Some argue that increasing the price of Murabaha goods for the deferred payment period is akin to charging interest. Let us examine this issue for our better understanding.

Please keep in mind that according to Sharia, money and commodities have different characteristics and, therefore, are to be treated differently. The owner of a commodity is at liberty to set the price and the buyer, too, can exercise his free will in buying the commodity at a certain price.

Deferred basis

As such, setting the sale price higher on payment on a deferred basis will be considered interest only if the subject matter is money at both ends e.g. a loan at a certain interest rate.

But if a commodity is sold in exchange for money, the seller — when fixing the price — may take into consideration different factors while determining his selling price. And that can include the time sought by the buyer in settling the purchase price.

This is because if the seller had received payment in cash he would have been in a position to re-invest it in the business by purchasing fresh goods and earning more profit by selling these.

The seller could have repeated this a number of times during the period that he now has to wait for the sale proceeds. By allowing time to the buyer for payment, he is being deprived of that chain of trading activity and the additional profit connected with it.

Important aspect

Let us not forget that under Sharia, a golden principle of making a contract is Ijab wa Qubool or 'offer and acceptance'. A series of articles was published in these pages on contracts under Sharia.

By applying the Ijab wa Qubool principle on a deferred sale transaction, it will be clear that the seller can exercise his right to offer certain goods at a certain price and the buyer may accept or reject it. So where is the element of Riba (interest) in Murabaha?

Therefore, it is not prohibited by Sharia to set different prices for the same commodity if sold for immediate cash or on a deferred payment basis provided the buyer has accepted the price willingly since the agreed price is against a commodity and not against money.

However, the most important aspect which differentiates an Islamic bank from a conventional one is that once the price is fixed, it cannot be changed irrespective of whether the buyer pays on time or defaults. This position is accepted unanimously by all schools of Islamic jurisprudence and the majority of Muslim jurists.

Knowing this limitation, some customers often intentionally default on their Murabaha commitments to an Islamic bank. This 'pattern' is likely to be curtailed soon since most of the Sharia scholars have realised this anomaly and are working to allow the levying of a late penalty, which would then be donated to charity.

The writer is the vice-president, Sharia Structuring, Documentation and Product Development, Dubai Islamic Bank.

[keilysmith]

It is one of the main characteristics that proponents of Islamic economics that make it different from Western classical economics way.Islamic also emphasises the belief in enjoying the largest Muslim community.

[Galles]

According to capitalist theory, there is no difference between money and commodity in so far as commercial transactions are concerned. Accordingly, both are treated at par and can be sold at whatever price parties agree upon.