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To take the definition of Murabaha from Wikipedia:

This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the default is settled.

The "profit margin" is fixed, the purchase and selling price is fixed. In other words, it's reselling something of equal value at a higher price.

The definition of Riba (from Wikipedia) is an increase in capital without any services provided and speculation.

A definition of Riba, as provided in Sahih Muslim, Book 10, Chapter 19, Number 3846:

Nafi' reported that Ibn 'Umar told him that a person of the tribe of Laith said that Abu Sa'id al-Kludri narrated it (the above-mentioned hadith) from tile Messenger of Allah (may peace be upon him) in a narration of Qutaiba. So 'Abduliali and Nafi' went along with him, and in the hadith transmitted by Ibn Rumh (the words are) that Nafi' said: 'Abdullah (b.'Umar) went and I along with the person belonging to Banu Laith entered (the house) of Sa'id al-Khudri, and he ('Abdullah b. Umar) said: I have been informed that you say that Allah's Messenger (may peace be upon him) forbade the sale of silver with silver except in case of like for like, and sale of gold for gold except in case of like for like. Abu Sa'id pointed towards this eyes and his ears with his fingers and said: My eyes saw, and my ears listened to Allah's Messenger (may peace be upon him) saying: Do not sell gold for gold, and do not sell silver for silver except in case of like for like, and do not increase something of it upon something, and do not sell for ready money something, not present, but hand to hand.

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  • i do not understand "and do not increase something of it upon something" , "and do not sell for ready money something, not present, but hand to hand".
    – qdinar
    Aug 30, 2015 at 23:30

3 Answers 3

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Murabaha is, in its essence, just a pair of shari'ah-compliant trades:

  • The bank purchases a good at market value.
  • The bank adds its profit margin and resells the good to the end buyer

Adding a profit when reselling a good is rather fundamental to trade, and can hardly be considered riba; God has clearly permitted one and forbidden the other. The only difference between a regular trade and a murabaha agreement is that the end buyer and price profit margin are agreed to in advance.

What is important to note is that the first trade needs to be completed in full: The involved good is fully and completely owned by the bank after they purchase it before it can then be resold to the end buyer. Until such time as the final sale is transacted with the end buyer, the bank legally owns the property (and is responsible for any risks and/or costs that may entail).

While often used as a form of long-term Islamic financing, murabaha can just as easily be used in a more immediate sense (e.g. having someone acquire a particular product for you if you can't leave the house). The "services provided" — be they for the long-term or the immediate transaction — would be the willingness and ability of the third party (e.g. the bank) to serve as an intermediary.

Is this provided service worth the profit margin involved? That's up to the end buyer (and basic supply and demand) to decide.

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    Not quite convinced that it is in fact trade and not riba. Edited the question to cover why it may be riba - because you are exchanging a higher amount of currency for something that was bought for a lower amount. I agree that some services given would justify it, like services as an intermediary, which is a common definition of trade. But what about the common usage in banking, as in buying it for someone who can't afford it yet? If the bank buys a house for someone and they refuse to pay the profit margin, the bank can legally reclaim the house, resulting in no risk for the bank.
    – Muz
    Apr 21, 2013 at 12:09
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Let's look at another example.

Let's say one housing developer wants to sell his houses direct to customers from his real estate project. He does not use any banks or any kinds of financing in order to sell his houses since he will be responsible for the selling and the collections of the installments within 20 years. He has calculated that each of the houses that he has completed costs USD200,000. He decided to sell the house at a price of USD250,000; a mark up of USD50,000 over the costs as profit.

The question is can we say the property developer has involved in riba' when he marked up the price for profit, even though the completion of payment is within 20 years? Lest we forget, houses are not gold or silver, where the exchange needs to be based on the same weight and units plus the exchange need to be executed on the spot.

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I have revised this answer to respond to the moderator's deletion of my previous answer

A financial analyst would consider a time dependent deferred markup on the sale price (murabaha) the equivalent of interest. But reasonable interest in modern regulated financial markets is not the exploitive riba.

Professor el-Gamal discusses the issue in https://www.researchgate.net/publication/266409585_Incoherence_of_Contract-Based_Islamic_Financial_Jurisprudence_in_the_Age_of_Financial_Engineering

He argues that prohibited transactions can be synthesized through the use of several sharia compliant transactions. Consequently the original prohibition becomes incoherent because it has no rationale related to the fundamental issues of justice, fairness and the maqasid sharia.

Mahmoud A. El-Gamal, Ph.D., is professor in the Department of Economics at Rice University, where he also holds the endowed Chair in Islamic Economics, Finance and Management. He has published extensively on Islamic economics and finance.

To answer the question directly, then, I conclude that deferred markup murabaha and interest are similar in that the bank is being compensated for the use of its money. But if riba is really about exploitation (as modernist scholars Fazlur Rahman and Abdullah Saeed would argue), then neither reasonable market based interest or deferred markup murabaha are riba. Loan sharking and predatory lending upon the poor (the activities of moneylenders at the time of the prophet) is riba.

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  • I think there's a gist of a good answer here - it cites an expert, and the linked paper seems to be well thought out. The downvotes probably come from well, calling the original prohibition incoherent, which is quite the insult but I think something is lost in translation. I do think there's a missing link in the chain here - why do scholars think that the original riba ruling was about exploitation? You could say the ruling on pork being non-halal is incoherent because it's no longer hazardous thanks to modern technology, but that's not the original ruling.
    – Muz
    Jul 19 at 10:56
  • Thanks for the support. As for the "incoherence" - I agree its somewhat inflammatory, but its not my word, its el Gamal's, and that is the rough and tumble of American academic debate. I think he means that the rather opaque, cumbersome, and more expensive sharia compliant copies of conventional financial instruments do not cohere to the masaqid sharia - preservation of wealth - justice, fairness, etc. Aug 12 at 12:03
  • Your question - was the original riba ruling about exploitation? The reason is explained in Rahman's paper "Riba and Interest" (Islamic Studies, Islamabad, 1964). It was the redoubling of unpaid debt that was riba - becoming an enormous burden, not the initial markup. Prof Farooq examines this issue in papers.ssrn.com/sol3/papers.cfm?abstract_id=1412753 , showing that early scholars (before al Jassas) had this view as well, but that it evolved (mistakenly) into the view that all interest is riba. Abdullah Saeed (Islamic Studies, Melbourne) has done his PhD on this issue. Aug 12 at 12:33
  • So to conclude, I think goldpseudo oversteps his duty by deleting answers he does not personally agree with. But he probably does a good job in weeding out the off-the-wall comments and rants you get in reddit and youtube. Aug 12 at 12:37

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