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Islamic Contract – Bay’ al-Murābahah: Basic Rules and Conditions of Murābahah
Q1: What are the basic rules and conditions of a murābahah contract?
Answer:
Since murābahah is a type of sale contract, all general conditions of a valid sale contract in Islamic law also apply to murābahah. In addition, there are specific conditions that must be fulfilled for a murābahah contract to be valid.
The basic rules and conditions are as follows:
Q2: Why must the cost price be disclosed in murābahah?
Answer:
The cost price must be disclosed because murābahah is a trust-based (fiduciary) sale contract. The buyer must know the actual cost incurred by the seller for the contract to be valid.
According to the majority of Shariah scholars:
Case Scenario
A trader purchases ten different electronic items in one bulk transaction for RM20,000 but does not know the individual cost of each item. Since the exact cost of each item is unknown, the trader cannot sell the items individually on a murābahah basis. However, the trader may still sell them through musāwamah by negotiating the selling price without disclosing the original cost.
Q3: Why must the profit margin be disclosed?
Answer:
The markup or profit margin must also be disclosed because it forms part of the selling price in a murābahah contract. The buyer must clearly know:
Case Scenario
An Islamic bank purchases machinery for RM50,000 and informs the customer that:
Q4: What kind of asset can be sold through murābahah?
Answer:
The subject matter of murābahah must be recognised as valuable property (māl) under Shariah. Therefore, prohibited or impure items cannot be the subject matter of a murābahah contract.
Examples of prohibited items include:
Case Scenario
A businessman seeks financing from an Islamic bank to purchase alcoholic beverages for resale. The Islamic bank cannot enter into a murābahah contract for this transaction because alcohol is prohibited and is not recognised as lawful property under Shariah.
Q5: Why must murābahah avoid ribā?
Answer:
A murābahah contract must not involve any element of ribā (usury or interest). If the subject matter is a ribawī item (an item subject to the rules of ribā in sales), the transaction must comply with Shariah requirements to prevent ribā from occurring.
If ribawī items of the same type are exchanged with an increment, the increment is considered ribā rather than legitimate profit.
Therefore:
A person exchanges 100 grams of gold for 120 grams of gold through a murābahah arrangement and claims that the extra 20 grams represent profit. This transaction is invalid because the increment in the exchange of the same ribawī item constitutes ribā rather than lawful profit.
However, if 100 grams of gold are exchanged for exactly 100 grams of gold without any increment, the transaction may be permissible through tawliyah because no ribā exists.
Notes: Important Conditions for a Valid Murābahah Contract
Disclosure Requirement
Q1: What are the basic rules and conditions of a murābahah contract?
Answer:
Since murābahah is a type of sale contract, all general conditions of a valid sale contract in Islamic law also apply to murābahah. In addition, there are specific conditions that must be fulfilled for a murābahah contract to be valid.
The basic rules and conditions are as follows:
Q2: Why must the cost price be disclosed in murābahah?
Answer:
The cost price must be disclosed because murābahah is a trust-based (fiduciary) sale contract. The buyer must know the actual cost incurred by the seller for the contract to be valid.
According to the majority of Shariah scholars:
- failure to disclose the cost price renders the murābahah contract null and void.
- the contract becomes fāsid (defective) but rectifiable;
- once the defect is corrected through proper disclosure, the contract becomes valid.
Case Scenario
A trader purchases ten different electronic items in one bulk transaction for RM20,000 but does not know the individual cost of each item. Since the exact cost of each item is unknown, the trader cannot sell the items individually on a murābahah basis. However, the trader may still sell them through musāwamah by negotiating the selling price without disclosing the original cost.
Q3: Why must the profit margin be disclosed?
Answer:
The markup or profit margin must also be disclosed because it forms part of the selling price in a murābahah contract. The buyer must clearly know:
- how much represents the original cost; and
- how much represents the seller’s profit.
Case Scenario
An Islamic bank purchases machinery for RM50,000 and informs the customer that:
- the cost price is RM50,000; and
- the bank’s profit margin is RM8,000.
Q4: What kind of asset can be sold through murābahah?
Answer:
The subject matter of murābahah must be recognised as valuable property (māl) under Shariah. Therefore, prohibited or impure items cannot be the subject matter of a murābahah contract.
Examples of prohibited items include:
- pork;
- wine;
- blood; and
- other unlawful substances.
Case Scenario
A businessman seeks financing from an Islamic bank to purchase alcoholic beverages for resale. The Islamic bank cannot enter into a murābahah contract for this transaction because alcohol is prohibited and is not recognised as lawful property under Shariah.
Q5: Why must murābahah avoid ribā?
Answer:
A murābahah contract must not involve any element of ribā (usury or interest). If the subject matter is a ribawī item (an item subject to the rules of ribā in sales), the transaction must comply with Shariah requirements to prevent ribā from occurring.
If ribawī items of the same type are exchanged with an increment, the increment is considered ribā rather than legitimate profit.
Therefore:
- ribawī items of the same genus and quantity cannot be traded through murābahah if an increment exists;
- they also cannot be traded through wadī‘ah if a discount or increment leads to ribā;
- however, they may be exchanged through tawliyah if no increment occurs.
A person exchanges 100 grams of gold for 120 grams of gold through a murābahah arrangement and claims that the extra 20 grams represent profit. This transaction is invalid because the increment in the exchange of the same ribawī item constitutes ribā rather than lawful profit.
However, if 100 grams of gold are exchanged for exactly 100 grams of gold without any increment, the transaction may be permissible through tawliyah because no ribā exists.
Notes: Important Conditions for a Valid Murābahah Contract
Disclosure Requirement
- Cost price must be disclosed.
- Profit margin must be disclosed.
- Final sale price must be clearly agreed upon.
- Asset must be lawful and recognised by Shariah.
- Prohibited items cannot be sold through murābahah.
- Transaction must not involve ribā.
- Ribawī items must comply with Islamic rules of exchange.
- The seller must know the exact cost of the asset.
- Uncertainty regarding cost may invalidate the murābahah contract.
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