​Islamic Contract – Bay’ al-Murābahah: Late Payment Charges in Murābahah Transactions
Q1: What are late payment charges in murābahah financing?
Answer:
Late payment charges refer to charges imposed on customers who fail to make payment within the agreed payment period in a murābahah contract.
In Islamic finance, late payment charges are carefully regulated to ensure that they:

• do not amount to ribā (interest); and
• are imposed only for legitimate Shariah purposes such as compensation or deterrence against intentional delay.

Q2: What is the AAOIFI position regarding late payment charges?
Answer:
According to AAOIFI Shariah Standard No. 8 (Para 5/6):

• the murābahah contract may include an undertaking by the customer to pay an amount of money or percentage of the debt upon late payment;
• however, the amount collected must be donated to charitable causes.

This means:

• the Islamic bank cannot treat the penalty amount as profit or income;
• the purpose is mainly to discourage deliberate default by customers.

AAOIFI adopts this approach because:

• benefiting financially from late payment resembles ribā;
• therefore, any collected penalty should not enrich the bank.

Q3: What is the BNM position regarding late payment charges?
Answer:
According to the Bank Negara Malaysia (BNM) Policy Document on Murābahah (Para 19.1):

• the murābahah contract may include a clause imposing late payment charges;
• these charges may consist of:
  • gharamah (penalty); and
  • ta‘wīd (compensation).

The amount imposed must follow the rates and guidelines determined by the relevant authorities.
Meaning of Gharamah

• Penalty imposed to deter late payment.
• Usually channelled for charitable purposes and not recognised as bank profit.

Meaning of Ta‘wīd

• Compensation for actual loss suffered by the bank due to delayed payment.
• May be recognised as income to the extent of actual losses incurred.

BNM’s approach balances:

• Shariah compliance;
• operational practicality; and
• financial discipline in Islamic banking.

Comparison Notes: AAOIFI vs BNM on Late Payment Charges
AAOIFI Position

• Late payment undertaking allowed.
• Amount collected must be donated to charity.
• Bank cannot profit from customer’s delay.
• Stronger precaution against ribā.

BNM Position

• Late payment charges expressly allowed.
• Includes:
  • gharamah (penalty); and
  • ta‘wīd (compensation).
• Charges subject to regulatory limits.
• Bank may recover actual losses through ta‘wīd.

Case Study 1: AAOIFI Approach on Late Payment
An Islamic bank provides murābahah financing for equipment.
Figures

• Murābahah selling price: RM120,000
• Monthly instalment: RM2,000
• Customer delays payment for 3 months.

The contract states:
“In the event of late payment, the customer undertakes to contribute 1% of overdue instalments for charitable purposes.”
Calculation

• Overdue amount = RM6,000
• 1% late payment amount = RM60

The RM60 collected:

• cannot be recognised as bank profit;
• must be channelled to charity.

Analysis

• Purpose is deterrence, not profit-making.
• This arrangement complies with AAOIFI standards.

Case Study 2: BNM Approach on Late Payment
An Islamic bank grants home financing through murābahah.
Figures

• Murābahah selling price: RM500,000
• Monthly instalment: RM3,000
• Customer delays payment for 4 months.
• Total overdue amount = RM12,000

The contract includes:

• ta‘wīd rate = 1% per annum;
• gharamah imposed according to BNM guidelines.

Calculation Example
Ta‘wīd (Compensation)
RM12,000 \times 1\% \times \frac{4}{12}
12000 \times 1% \times \frac{4}{12} = 40
Ta‘wīd payable = RM40
Additional gharamah may also be imposed according to regulatory guidelines.
Analysis

• Ta‘wīd compensates the bank for actual losses caused by delayed payment.
• Gharamah functions as a deterrent penalty.
• The arrangement complies with BNM requirements.

Notes: Important Principles Regarding Late Payment Charges
AAOIFI Emphasis

• Penalties allowed only as deterrence.
• Amount collected must go to charity.
• Bank cannot profit from delay.

BNM Emphasis

• Allows both:
  • ta‘wīd (compensation); and
  • gharamah (penalty).
• Charges regulated by authorities.
• Bank may recover actual losses.

Common Shariah Principle
Late payment charges in Islamic finance must:

• avoid ribā;
• prevent injustice;
• encourage payment discipline; and
• remain within Shariah-approved limits.

​Islamic Contract – Bay’ al-Murābahah: Ibrā’ (Rebate) in Murābahah Transactions
Q1: What is Ibrā’ in Islamic finance?
Answer:
Ibrā’ refers to a rebate, waiver, or remission granted by the seller or Islamic bank to the purchaser by reducing part of the outstanding payment obligation.
In murābahah financing, ibra’ commonly occurs when:

• the customer settles the financing earlier than scheduled; or
• the bank voluntarily grants a discount on the outstanding balance.

Ibrā’ is based on the concept of benevolence and goodwill in Islamic commercial transactions.


Q2: Why is Ibrā’ important in murābahah financing?
Answer:
Ibrā’ is important because murābahah financing usually involves deferred payment over a long period.
When customers:

• make early settlement; or
• complete payment before maturity,

Islamic banks may provide a rebate by deducting:

• unearned profit; or
• part of the remaining sale price.

This ensures fairness to the customer because:

• the bank receives payment earlier than expected; and
• the bank no longer bears financing risk for the remaining period.

Q3: What is the AAOIFI position regarding Ibrā’?
Answer:
According to AAOIFI Shariah Standard No. 8 (Para 5/9):

• ibra’ cannot be stipulated as part of the murābahah contract.

This means:

• the bank cannot contractually promise a rebate in advance;
• ibra’ must remain a voluntary act by the seller.

AAOIFI adopts this position because:

• making ibra’ contractually binding may resemble interest recalculation in conventional loans.

Thus, under AAOIFI:

• the rebate should be discretionary and not pre-agreed within the contract itself.

Q4: What is the BNM position regarding Ibrā’?
Answer:
According to the Bank Negara Malaysia (BNM) Policy Document on Murābahah (Para 18.2):

• ibra’ must be included as part of the contract if required by the regulator.

In Malaysia:

• Islamic financial institutions are generally required to specify ibra’ clauses in financing agreements.

This approach aims to:

• promote transparency;
• protect customers;
• standardise early settlement calculations; and
• ensure fairness in Islamic financing practices.

Comparison Notes: AAOIFI vs BNM on Ibrā’
AAOIFI Position

• Ibrā’ cannot be part of the murābahah contract.
• Rebate must remain voluntary.
• Concerned that contractual rebate resembles interest adjustment.
• Emphasises discretionary benevolence.

BNM Position

• Ibrā’ clause must be included if required by regulation.
• Rebate calculation becomes transparent and predictable.
• Protects customers in early settlement situations.
• Widely applied in Malaysian Islamic banking practice.

Case Study 1: AAOIFI Approach on Ibrā’
An Islamic bank finances machinery through murābahah.
Figures

• Cost price: RM100,000
• Profit margin: RM20,000
• Murābahah selling price: RM120,000
• Payment period: 5 years

After 2 years, the customer wishes to settle the balance early.
The bank voluntarily grants:

• RM8,000 rebate (ibrā’) on the remaining balance.

Analysis

• The rebate was not pre-promised in the contract.
• The bank granted it voluntarily.
• This complies with AAOIFI standards.

Case Study 2: BNM Approach on Ibrā’
An Islamic bank provides home financing through murābahah.
Figures

• House purchase cost: RM300,000
• Profit margin: RM90,000
• Murābahah selling price: RM390,000
• Financing tenure: 20 years

The financing contract expressly states:
“The customer shall be entitled to ibra’ for early settlement based on the bank’s rebate formula.”
After 10 years:

• outstanding balance = RM220,000
• bank grants RM25,000 ibra’
• customer pays final settlement amount = RM195,000

Analysis

• Ibrā’ was expressly included in the contract.
• Rebate calculation was transparent and predetermined.
• This complies with BNM regulatory requirements.

Notes: Important Principles Regarding Ibrā’
AAOIFI Emphasis

• Ibrā’ should remain voluntary.
• Cannot be contractually stipulated.
• Avoids resemblance to conventional interest adjustments.

BNM Emphasis

• Ibrā’ clause included for transparency.
• Regulatory protection for customers.
• Standardised industry practice.

Common Shariah Principle
Ibrā’ represents:

• fairness;
• benevolence; and
• equitable treatment in deferred payment transactions.

​Islamic Contract – Bay’ al-Murābahah: Meaning of “Absorbing the Takaful Cost”
Q1: What does “absorbing the takaful cost” mean in murābahah?
Answer:
“Absorbing the takaful cost” means bearing or paying the takaful contribution associated with the asset.
In the context of murābahah:

• the takaful cost may either be borne by the seller (Islamic bank); or
• paid directly by the purchaser (customer), depending on the contractual arrangement.

When BNM states that:
“the purchaser may absorb the takaful cost before entering into the murābahah contract,”
it means:

• the customer agrees to pay the takaful contribution separately before the murābahah sale contract is executed.

Example 1: Seller Absorbs the Takaful Cost (AAOIFI Approach)
An Islamic bank purchases machinery for murābahah financing.
Figures

• Cost of machinery: RM200,000
• Takaful contribution paid by bank: RM5,000
• Total acquisition cost: RM205,000
• Profit margin: RM20,000
• Murābahah selling price: RM225,000

Explanation
Here:

• the bank initially bears (“absorbs”) the takaful cost of RM5,000;
• the bank includes it as part of the acquisition cost.

Thus:
RM200,000 + RM5,000 = RM205,000 acquisition cost
The customer then pays:
RM225,000 = RM205,000 cost + RM20,000 profit
Key Point
The takaful cost becomes part of the murābahah selling price because the bank paid it first.


Example 2: Purchaser Absorbs the Takaful Cost (BNM Approach)
A customer applies for Islamic vehicle financing.
Figures

• Vehicle price: RM100,000
• Takaful contribution: RM3,000
• Bank’s profit margin: RM15,000
• Murābahah selling price: RM115,000

Arrangement
Before the murābahah contract:

• the customer separately agrees to pay the RM3,000 takaful contribution directly.

Therefore:

• the bank’s acquisition cost remains RM100,000;
• the murābahah selling price becomes RM115,000 only.

The customer separately pays:

• RM3,000 takaful contribution; and
• RM115,000 murābahah price.

Total customer payment

• Murābahah price = RM115,000
• Separate takaful payment = RM3,000
• Total overall payment = RM118,000

Key Point
The purchaser “absorbs” the takaful cost because:

• the customer personally bears and pays the takaful expense instead of the bank including it in the murābahah cost.

Simple Difference Between the Two Approaches
Seller Absorbs Takaful Cost

• Bank pays takaful first.
• Takaful included in murābahah cost.
• Customer indirectly pays through instalments.

Purchaser Absorbs Takaful Cost

• Customer pays takaful separately.
• Takaful excluded from murābahah cost.
• Murābahah selling price becomes lower.

Islamic Contract – Bay’ al-Murābahah: Takaful Coverage for Asset Under Seller’s Possession


Q1: What is the purpose of takaful coverage in a murābahah transaction?


Answer:
In a murābahah transaction, the seller or Islamic bank may obtain takaful coverage for the asset while it remains under the seller’s ownership and possession before being sold to the purchaser.


The purpose of takaful is to:

• protect the asset against damage or loss;

• manage ownership risks borne by the seller; and

• ensure proper risk management in accordance with Shariah principles.

This reflects the Shariah principle:


“Risk accompanies ownership.”


Since the seller owns the asset before resale, the seller bears the associated risks during that ownership period.




Q2: What is the AAOIFI position regarding takaful cost?


Answer:
According to AAOIFI Shariah Standard No. 8 (Paras 3/2/6–3/2/7):

• the seller is obligated to bear the takaful cost while the asset remains under the seller’s possession; and

• the seller may include the takaful expense as part of the acquisition cost of the asset.

This means the seller initially bears the takaful responsibility because the seller still owns the asset before transferring ownership to the purchaser.


⸻


Q3: What is the BNM position regarding takaful cost?


Answer:
According to the Bank Negara Malaysia (BNM) Policy Document on Murābahah (Para 17.5):

• the purchaser may absorb the takaful cost before entering into the murābahah contract.

This allows:

• greater operational flexibility; and

• cost-sharing arrangements agreed upon between the parties before the sale contract is concluded.

However, the arrangement must be:

• clearly agreed upon; and

• properly documented.

Comparison Notes: AAOIFI vs BNM on Takaful Cost


AAOIFI Position

• Seller bears takaful cost during ownership period.

• Takaful cost may be included in acquisition cost.

• Emphasises ownership-risk principle.

• Seller remains responsible until ownership transfer.

BNM Position

• Purchaser may absorb takaful cost before murābahah contract.

• Allows more operational flexibility.

• Requires proper contractual documentation.

• Commonly applied in Islamic banking practice.

Case Study 1: AAOIFI Approach with Figures


An Islamic bank purchases industrial machinery for a customer under a murābahah arrangement.


Transaction Details

• Purchase price of machinery: RM200,000

• Takaful contribution paid by the bank: RM5,000

• Total acquisition cost borne by the bank: RM205,000

• Bank’s profit margin: RM25,000

• Final murābahah selling price: RM230,000

The bank obtains takaful coverage while the machinery remains under its ownership before reselling it to the customer.


Analysis

• The bank bore the takaful cost because it owned the machinery.

• The takaful contribution was included as part of the acquisition cost.

• The customer was informed that:

• original cost = RM205,000; and

• profit = RM25,000.

• This arrangement complies with AAOIFI standards.

Case Study 2: BNM Approach with Figures


A customer applies for murābahah vehicle financing from an Islamic bank.


Transaction Details

• Purchase price of vehicle: RM100,000

• Takaful contribution: RM3,000

• Customer agrees to bear takaful contribution before murābahah execution.

• Bank’s disclosed acquisition cost: RM100,000

• Bank’s profit margin: RM15,000

• Final murābahah selling price: RM115,000

Before the murābahah contract is concluded, the customer separately agrees to pay the RM3,000 takaful contribution.


Analysis

• The purchaser absorbed the takaful cost before the sale contract.

• The bank’s murābahah cost excluded the takaful amount.

• Proper documentation separated:

• takaful arrangement; and

• murābahah contract.

• This arrangement is permissible under BNM guidelines.

Notes: Important Principles Regarding Takaful in Murābahah


AAOIFI Emphasis

• Ownership risk remains with seller before sale.

• Seller responsible for takaful during ownership period.

• Takaful expense may be included in cost price.

BNM Emphasis

• Purchaser may absorb takaful cost earlier.

• Greater flexibility in banking operations.

• Proper agreement and documentation required.

Common Shariah Principle


The party bearing ownership risk should generally bear the corresponding liabilities and responsibilities associated with the asset until ownership is transferred.

​Islamic Contract – Bay’ al-Murābahah: Promise by the Purchase Orderer
Q1: What is meant by the promise of the purchase orderer in murābahah?
Answer:
In Murābahah to the Purchase Orderer (MPO), the purchase orderer (customer) usually gives a promise (wa‘d) to purchase the asset after the seller or Islamic bank acquires it.
This promise is important because:

• the Islamic bank purchases the asset based on the customer’s request; and
• the promise helps reduce the bank’s ownership and market risks.

Q2: What is the AAOIFI position regarding the customer’s promise?
Answer:
According to AAOIFI Shariah Standard No. 8 (Para 2/3/3):

• the promise may either:
  • be binding; or
  • include an option to cancel.

This means AAOIFI provides flexibility regarding whether the customer must compulsorily complete the purchase.
The approach depends on:

• the agreement between the parties; and
• the structure adopted by the Islamic financial institution.

Q3: What is the BNM position regarding the customer’s promise?
Answer:
According to the Bank Negara Malaysia (BNM) Policy Document on Murābahah (Para 15.2):

• the promise becomes binding once the seller or Islamic bank takes action to acquire the asset.

This means:

• after the bank incurs costs or purchases the asset based on the customer’s undertaking,
• the customer can no longer freely withdraw from the promise without consequences.

This rule protects the Islamic bank from financial loss after relying on the customer’s commitment.


Comparison Notes: AAOIFI vs BNM on Promise by the Purchase Orderer
AAOIFI Position

• Promise may be:
  • binding; or
  • non-binding with cancellation option.
• Greater contractual flexibility.
• Focuses on preserving voluntary consent.

BNM Position

• Promise becomes binding once the bank acts to acquire the asset.
• Protects the bank from ownership and commercial risks.
• Provides stronger operational certainty in Islamic banking practice.

Case Study: Promise to Purchase Machinery
A company requests an Islamic bank to purchase machinery worth RM500,000 through a murābahah arrangement.
The company signs a promise to purchase the machinery after the bank acquires it.
The bank then:

1. purchases the machinery from the supplier; and
2. incurs transportation and documentation costs.

Later, the company attempts to cancel the transaction.
Under AAOIFI

• If the promise was structured as non-binding with cancellation rights, cancellation may be possible depending on the agreement.
• If the promise was binding, the customer may be required to honour the undertaking.

Under BNM

• Once the bank acted to acquire the machinery, the promise became binding.
• The customer may be required to proceed with the purchase or compensate the bank for losses suffered.

Analysis
The difference reflects:

• AAOIFI’s more flexible contractual approach; and
• BNM’s stronger protection of Islamic banks as financial intermediaries in murābahah financing operations.

​Islamic Contract – Bay’ al-Murābahah: Comparison Between AAOIFI and BNM Requirements for Murābahah
Q1: What is the difference between AAOIFI and BNM regarding the appointment of the purchase orderer as an agent?
Answer:
AAOIFI and Bank Negara Malaysia (BNM) differ in their approach regarding whether the purchase orderer may act as an agent to purchase the murābahah asset.
AAOIFI Standard (Shariah Standard No. 8)
According to AAOIFI:

• appointing the purchase orderer as an agent to purchase the murābahah asset is generally not allowed;
• it is only permitted in cases of dire need.

This position is stated in:
AAOIFI Shariah Standard No. 8, Paragraph 3/1/3.
AAOIFI adopts a stricter approach to prevent:

• legal manipulation (hīlah);
• fictitious transactions; and
• situations where ownership transfer may not genuinely occur.

Bank Negara Malaysia (BNM) Policy Document on Murābahah
According to BNM:

• the purchase orderer may be appointed as an agent to purchase the murābahah asset;
• however, the agency appointment and murābahah contract must not be combined in the same document.

This position is stated in:
BNM Policy Document on Murābahah, Paragraphs 16.1–16.2.
BNM allows this structure to facilitate practical Islamic banking operations while still maintaining:

• separation between agency and sale contracts; and
• proper ownership transfer procedures.

Comparison Notes: AAOIFI vs BNM on Agency Appointment
AAOIFI Position

• Generally prohibits appointing the purchase orderer as agent.
• Permits it only in exceptional or necessary circumstances.
• Adopts a stricter Shariah governance approach.
• Concerned about fictitious ownership and legal stratagems.

BNM Position

• Allows the purchase orderer to act as agent.
• Requires agency agreement and murābahah contract to be separate documents.
• Focuses on operational practicality in Islamic finance.
• Ensures procedural safeguards to preserve Shariah compliance.

Case Study: Appointment of Customer as Purchasing Agent
A customer wishes to purchase industrial equipment through murābahah financing from an Islamic bank.
Instead of the bank directly purchasing the equipment:

• the bank appoints the customer as its agent to purchase the equipment from the supplier;
• after the purchase is completed on behalf of the bank, the bank then sells the equipment to the customer through a murābahah contract.

Under AAOIFI

• This arrangement is generally discouraged unless there is genuine necessity.
• AAOIFI fears the arrangement may merely simulate ownership transfer without actual possession by the bank.

Under BNM

• The arrangement is permissible.
• However:
  • the agency appointment document must be separate from the murābahah sale contract; and
  • the bank must still ensure proper ownership and risk transfer before resale.

Analysis
The difference reflects:

• AAOIFI’s stricter precautionary approach; and
• BNM’s more practical regulatory approach tailored to modern Islamic banking operations.

Islamic Contract – Bay’ al-Murābahah: Application of Murābahah in Islamic Finance
Q1: How is murābahah applied in Islamic finance?
Answer:
Murābahah is one of the most widely used financing mechanisms in Islamic finance and Islamic banking. Islamic banks apply murābahah mainly through the concept of Murābahah to the Purchase Orderer (MPO).
Under this arrangement:

• the customer identifies an asset he wishes to acquire;
• the Islamic bank purchases the asset from the supplier;
• the bank then sells the asset to the customer at a disclosed cost plus profit markup; and
• payment is usually made through deferred instalments.

Murābahah is widely used because it provides:

• a Shariah-compliant alternative to interest-based financing;
• certainty in pricing and repayment obligations; and
• relatively lower business risk for Islamic banks.

Q2: What types of financing commonly use murābahah?
Answer:
Murābahah is commonly used in various Islamic financing facilities, including:
Home Financing
Islamic banks purchase a property and subsequently sell it to the customer at a disclosed markup price payable through instalments.
Motor Vehicle Financing
The bank purchases a vehicle requested by the customer and resells it at a higher deferred payment price.
Personal Financing
Murābahah structures may be used for personal financing through commodity-based transactions approved by Shariah standards.
Trade Financing
Murābahah is widely used in import and export financing where banks purchase goods and resell them to customers at a disclosed profit.


Q3: Why do Islamic banks commonly use the MPO structure?
Answer:
Islamic banks commonly use the Murābahah to the Purchase Orderer (MPO) structure because of their role as financial intermediaries.
The MPO structure helps Islamic banks:

• reduce ownership and market risks;
• ensure that the asset already has a buyer before purchase;
• minimise the possibility of unsold assets; and
• facilitate efficient financing operations.

In MPO:

• the customer first promises to purchase the asset;
• the bank only purchases the asset after receiving the customer’s undertaking.

This arrangement reduces the bank’s commercial exposure while maintaining Shariah compliance.


Q4: Why is ownership important in Islamic bank murābahah financing?
Answer:
Ownership is a fundamental Shariah requirement in murābahah financing.
The Islamic bank must:

1. genuinely purchase the asset;
2. obtain ownership and possession of the asset; and
3. only then sell the asset to the customer.

This distinguishes murābahah from a conventional loan because:

• the bank earns profit through sale and trade;
• not through lending money with interest.

If the bank merely finances the customer without owning the asset, the transaction may resemble ribā-based financing and become non-compliant with Shariah principles.


Case Study 1: Home Financing Through Murābahah
Zain wishes to purchase a house worth RM400,000 but lacks sufficient funds. He approaches an Islamic bank for financing.
The bank:

1. purchases the house from the developer;
2. obtains ownership of the property; and
3. sells the house to Zain for RM520,000 payable over 25 years.

The bank clearly discloses:

• the original purchase cost of RM400,000; and
• the profit margin of RM120,000.

Analysis

• The transaction is based on sale, not lending.
• Ownership is transferred to the bank before resale.
• The selling price is fixed and known in advance.
• The transaction uses the MPO concept.

This is a valid murābahah financing arrangement.


Case Study 2: Motor Vehicle Financing Through MPO
Farah wishes to purchase a car costing RM90,000. She requests an Islamic bank to purchase the car on her behalf.
The bank:

1. purchases the car from the dealer;
2. takes ownership of the vehicle; and
3. resells it to Farah for RM110,000 payable over seven years.

Analysis

• The customer initiated the request.
• The bank reduced ownership risk because the customer promised to purchase the car.
• The bank’s profit comes from the sale transaction.
• The deferred payment price is permissible because it was agreed upon at the contract stage.

This represents the practical application of MPO in Islamic banking.


Notes: Key Features of Murābahah Application in Islamic Finance
Common Applications

• Home financing
• Vehicle financing
• Personal financing
• Trade financing

Key Operational Features

• Customer identifies the asset.
• Islamic bank purchases and owns the asset first.
• Bank discloses cost and profit.
• Customer pays through deferred instalments.

Why Islamic Banks Prefer MPO

• Reduces ownership risk.
• Minimises unsold inventory risk.
• Provides predictable financing structure.
• Ensures Shariah-compliant profit generation.

Important Shariah Principle
The bank’s profit in murābahah must arise from a genuine sale transaction involving ownership and transfer of assets, not from lending money with interest.

​

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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​Islamic Contract – Bay’ al-Murābahah: Murābahah Involving Ribawī Items Such as Gold


Q1: Is it permissible to sell ribawī items such as gold through murābahah?


Answer:
Yes, it is permissible to sell ribawī items such as gold through murābahah, provided that the rules of ribā in Islamic law are strictly observed.


Gold is classified as a ribawī item. Therefore, transactions involving gold must comply with the Shariah rules governing the exchange of ribawī items.


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Q2: Is the exchange of gold for money permissible in murābahah?


Answer:
Yes. The exchange of gold for money is generally permissible because they are of different categories:

• gold is a ribawī commodity; and

• money functions as currency.

However, the transaction must fulfil the Shariah requirement of:

• immediate exchange (taqabud or possession); and

• absence of ribā and excessive uncertainty.

If the murābahah transaction involves deferred payment, scholars have discussed the issue extensively because gold and currency are both ribawī items associated with monetary value.


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Q3: Why is deferred payment involving gold controversial?


Answer:
The controversy arises because classical Islamic law treats gold and silver as currency. Under the rules of bay‘ al-sarf (currency exchange):

• the exchange of gold and money must generally occur on a spot basis; and

• deferment by one or both parties may lead to ribā al-nasī’ah (ribā due to delay).

For this reason, many classical scholars prohibit deferred sales of gold for money.


However, some contemporary scholars and Shariah standards permit deferred murābahah involving gold if:

• the gold is treated as a commodity rather than currency;

• ownership and possession are properly transferred; and

• the transaction avoids speculative or interest-based elements.

This approach is commonly adopted in certain Islamic banking and commodity murābahah practices today.


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Case Scenario 1: Permissible Spot Transaction


A jewellery shop sells a gold bracelet worth RM8,000 to a customer. The customer pays the full amount immediately, and the gold bracelet is handed over on the spot.


Analysis

• Gold is exchanged for money immediately.

• Both payment and delivery occur at the same session.

• No ribā arises.

This transaction is generally permissible under Shariah.


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Case Scenario 2: Problematic Deferred Transaction


A seller agrees to sell 100 grams of gold to a buyer today, but the buyer will only pay six months later.


Analysis

• Gold and money are exchanged on a deferred basis.

• Delay in payment may lead to ribā al-nasī’ah.

• Many classical scholars consider this impermissible.

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Case Scenario 3: Contemporary Murābahah Practice


An Islamic bank purchases gold bullion as a commodity investment and subsequently sells it to a customer through a structured murābahah arrangement. The bank first acquires ownership and possession of the gold before reselling it at a disclosed markup.


Analysis

• The transaction is structured as a commodity sale.

• Ownership transfer is essential.

• The permissibility depends on compliance with contemporary Shariah standards and regulatory guidelines.

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Notes: Important Rules on Gold in Murābahah


Permissible Situations

• Gold may be sold for money on a spot basis.

• Ownership and possession must be genuine.

• Cost price and profit must be disclosed in murābahah.

Impermissible Situations

• Exchange of gold for gold with unequal quantities.

• Deferred exchange that leads to ribā.

• Transactions involving speculation or fictitious ownership.

Key Principle


The main objective is to ensure that the transaction remains a genuine sale and does not become a disguised form of interest-based financing.