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Islamic Contract – Bay’ al-Murābahah: Pricing in Murābahah Transactions
Q1: Does Islamic law allow different prices for cash sales and deferred payment sales in murābahah?
Answer:
Yes. Islamic law recognises the legitimacy of having a higher price in a deferred payment sale compared to a cash sale in murābahah transactions.
A famous legal maxim states:
“Time is a portion of the price.”
This means that the deferred payment period may justify a higher selling price because the seller waits longer to receive payment.
For this reason, Muslim jurists generally permit:
Q2: Why is a higher deferred payment price permissible?
Answer:
According to al-Kāsānī of the Hanafi School, deferred payment warrants additional consideration (‘iwad) in the form of a price markup because time has value in commercial transactions.
The majority of Muslim jurists agree that:
Q3: What did classical Muslim jurists say about time preference?
Answer:
Classical jurists from various schools of Islamic law recognised that deferment affects pricing.
Maliki School – al-Dasūqī
Al-Dasūqī stated that the seller in murābahah must disclose the deferred payment period because:
“the deferred period comprises a portion of the price.”
Hanafi School – al-Kāsānī
Al-Kāsānī explained that:
“the price increases according to the deferred period.”
This means that a longer payment period may justify a higher sale price.
Shafi‘i School – al-Sharbīnī
Al-Sharbīnī stated that specifying the deferred payment period is necessary because:
“the deferral is equivalent to a portion of the sale price.”
Hanbali School – Ibn Taymiyyah
Ibn Taymiyyah similarly stated:
“the deferred period takes a portion of the sale price.”
These juristic opinions demonstrate that classical Islamic jurisprudence recognises the commercial value of time in exchange transactions.
Q4: Is there a limit on profit in murābahah?
Answer:
Muslim jurists differ regarding the maximum permissible profit margin in murābahah.
Majority View
The majority of scholars hold that:
The Maliki School restricts profit margins exceeding one-third of the original cost.
According to this view:
“A third is a lot.”
(al-Bukhāri, hadith no. 2742)
Q5: What is the position of the Shariah Advisory Council (SAC) Malaysia regarding pricing?
Answer:
The Shariah Advisory Council (SAC) of the Securities Commission Malaysia resolved in its 224th meeting held on 26 September 2019 that, in relation to sukūk issuance:
Case Study 1: Permissible Deferred Pricing in Murābahah
An Islamic bank purchases a vehicle for RM80,000. The bank offers the customer two payment options:
Analysis
Case Study 2: Impermissible Increase After Delay
A customer purchases equipment through murābahah for RM50,000 payable over three years. After missing several instalments, the seller increases the outstanding amount to RM60,000 solely because of the delay.
Analysis
Notes: Key Principles of Pricing in Murābahah
Permissible
In murābahah, time may influence the original sale price, but time alone cannot justify additional charges after the debt has already been established.
Q1: Does Islamic law allow different prices for cash sales and deferred payment sales in murābahah?
Answer:
Yes. Islamic law recognises the legitimacy of having a higher price in a deferred payment sale compared to a cash sale in murābahah transactions.
A famous legal maxim states:
“Time is a portion of the price.”
This means that the deferred payment period may justify a higher selling price because the seller waits longer to receive payment.
For this reason, Muslim jurists generally permit:
- a lower price for spot cash payment; and
- a higher price for deferred instalment payment.
- fixed;
- clearly known; and
- mutually agreed upon at the time the contract is concluded.
Q2: Why is a higher deferred payment price permissible?
Answer:
According to al-Kāsānī of the Hanafi School, deferred payment warrants additional consideration (‘iwad) in the form of a price markup because time has value in commercial transactions.
The majority of Muslim jurists agree that:
- deferment increases commercial risk and opportunity cost; and
- therefore justifies a higher selling price.
- inflation risk;
- uncertainty;
- delayed access to money;
- lost investment opportunities; or
- other market considerations.
- the price is fixed once at the contract stage; and
- no additional increase occurs due to late payment after the contract is concluded.
Q3: What did classical Muslim jurists say about time preference?
Answer:
Classical jurists from various schools of Islamic law recognised that deferment affects pricing.
Maliki School – al-Dasūqī
Al-Dasūqī stated that the seller in murābahah must disclose the deferred payment period because:
“the deferred period comprises a portion of the price.”
Hanafi School – al-Kāsānī
Al-Kāsānī explained that:
“the price increases according to the deferred period.”
This means that a longer payment period may justify a higher sale price.
Shafi‘i School – al-Sharbīnī
Al-Sharbīnī stated that specifying the deferred payment period is necessary because:
“the deferral is equivalent to a portion of the sale price.”
Hanbali School – Ibn Taymiyyah
Ibn Taymiyyah similarly stated:
“the deferred period takes a portion of the sale price.”
These juristic opinions demonstrate that classical Islamic jurisprudence recognises the commercial value of time in exchange transactions.
Q4: Is there a limit on profit in murābahah?
Answer:
Muslim jurists differ regarding the maximum permissible profit margin in murābahah.
Majority View
The majority of scholars hold that:
- Shariah does not fix a maximum profit limit;
- profit should be determined by market forces such as demand and supply; and
- contracting parties are free to negotiate a mutually acceptable price.
The Maliki School restricts profit margins exceeding one-third of the original cost.
According to this view:
- excessive profit (ghabn fāhish) is prohibited;
- profit beyond one-third may be considered exploitative.
“A third is a lot.”
(al-Bukhāri, hadith no. 2742)
Q5: What is the position of the Shariah Advisory Council (SAC) Malaysia regarding pricing?
Answer:
The Shariah Advisory Council (SAC) of the Securities Commission Malaysia resolved in its 224th meeting held on 26 September 2019 that, in relation to sukūk issuance:
- the purchase price of an identified asset must not exceed 1.51 times the asset’s fair value; or
- any other appropriate value determined for the asset.
Case Study 1: Permissible Deferred Pricing in Murābahah
An Islamic bank purchases a vehicle for RM80,000. The bank offers the customer two payment options:
- Cash payment price: RM85,000
- Deferred payment price over five years: RM100,000
Analysis
- The higher deferred price is permissible because:
- the price was fixed at the contract stage;
- both parties agreed to the deferred arrangement;
- no additional increase will occur after the contract.
Case Study 2: Impermissible Increase After Delay
A customer purchases equipment through murābahah for RM50,000 payable over three years. After missing several instalments, the seller increases the outstanding amount to RM60,000 solely because of the delay.
Analysis
- The additional increase due to delay resembles ribā.
- In murābahah, the price must remain fixed once agreed.
- Charging extra money merely because payment is late is generally prohibited.
Notes: Key Principles of Pricing in Murābahah
Permissible
- Higher price for deferred payment.
- Profit margin agreed upon at contract stage.
- Price fixed and certain.
- Deferred period clearly specified.
- Additional increase after contract due to delay.
- Uncertain or floating selling price.
- Excessive exploitation or injustice.
In murābahah, time may influence the original sale price, but time alone cannot justify additional charges after the debt has already been established.
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