Islamic Contract – Bay’ al-Murābahah: Pricing in Murābahah Transactions

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:

• a lower price for spot cash payment; and
• a higher price for deferred instalment payment.

However, the price must be:

• 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.

The higher price may reflect:

• inflation risk;
• uncertainty;
• delayed access to money;
• lost investment opportunities; or
• other market considerations.

Importantly, this concept of time preference is not automatically equivalent to ribā (interest), because:

• 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.

Maliki View
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.

This opinion is based on the hadith in which the Prophet Muhammad (SAW) stated:
“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.

This guideline aims to avoid excessive pricing and ensure fairness in Islamic financial transactions.


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

The customer agrees to purchase the vehicle for RM100,000 through monthly instalments.
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.

This is considered a valid murābahah transaction and not ribā.


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.

Impermissible

• Additional increase after contract due to delay.
• Uncertain or floating selling price.
• Excessive exploitation or injustice.

Important Principle
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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