2.1. Introduction
Murabaha is a
cost-plus profit sale contract whereby disclosure of cost to the buyer is
necessary. Under Murabaha arrangement customer requests to the Islamic
Financial Institution (IFI) to purchase an asset for him (customer) and sell on
deferred payment. An essential feature of Murabaha is that IFI must purchase
the required commodity from supplier first and then sell to the customer. Bank
charges a certain profit usually linked with Inter Bank Offered Rate. Recovery
could be agreed in installments or Balloon payment. Amount of installment or
price of the asset cannot be (stipulated) increased or decreased in case of
default or early payment (Shari’a standard 8). In order to create pressure on
client for prompt payment a penalty is imposed upon customer as agreed in
Murabaha contract. Amount of penalty for default in prompt payment recovered,
cannot be included in income of IFI in any case and must be spent for charity
(Usmani, 2002). Murabaha has successfully replaced the overdraft and short term
loans facility under conventional banking. Murabaha is dominant
mode of financing in portfolios of IFIs since the inception of Islamic banking due to its
easiness in practice and low risk as compared to profit and loss sharing modes
of financing.
Comparative study of conventional and Islamic
financial system reveals following important points as for rights, liabilities,
risks and rewards of the parties concerned. If client goes for conventional
fiancé he will get simply Rs; 6,000,000 loan in cash form for a charge of 10%
interest assuming same return as for Islamic bank. By the time loan approved
and available to customer an asset of 6 million is created as loans receivables
by conventional bank and another Liability of current deposit is created of
equal amount while cash and balances decrease as and when amount is withdrawn.
Conventional bank has no risk in this transaction except default on behalf of
customer. After expiry of one month
interest revenue of Rs; 50,000 is due hence form the income of conventional
bank. Asset (loan receivables) increased by Rs; 50,000 while liability of
customer is also increased by Rs; 50,000.
