Wednesday, July 30, 2008


Assalamu ‘Alaikum


This is another type of sale, also known as cost plus sale. You buy something then you sell it to some else at cost to you plus a profit margin. It is a rule of Murabahah that you must tell the buyer your cost and profit margin. That’s Islamic transparency for you.
Actually Bai’ Bithaman Ajil (BBA) is a form of Murabahah meaning it is also a cost plus sale, but it is where the buyer always pay the selling price in instalments. In a Murabahah transaction, the sale price can either be paid lump sum or instalment. So in short a BBA is always a Murabahah but a Murabahah is not always a BBA.

So how is this concept used in Islamic banking? In Malaysia it is used principally in trade finance whereas in the Middle East it is used for both trade finance as well as longer term project finance. What is trade finance? Well this is basically short term finance to meet the working capital requirements of companies to buy raw materials, to buy stocks, to pay for services rendered, to pay payroll and suchlikes. The other type of finance a company needs is long term finance to buy assets, to invest in other companies and to invest in projects. Murabahah for trade financing in Malaysia works like this. The Bank appoints the company, under the concept of Wakalah, as its Agent to buy say, the raw materials the company needs to manufacture its finished product. Having purchased the raw materials the bank then instructs the company as its agent, to sell to itself as a customer the raw materials at cost plus a profit margin. This price is payable by the Company to the Bank in one lump sum at the end of the normal trade finance period of 30, 60, 90, 180 up to a maximum of 360 days. At the end of the agreed period the Company pays to the Bank the Murabahah sale price in one lump sum. At all times both parties are informed of the cost and profit margin of the transaction.

The Middle East does not like this arrangement; they want the bank to take possession of the raw materials and deliver them to the Customer. Logically this is sound and clearly upholds the concept of Murabahah but in practical terms the bank will now have to deal with the logistics of warehousing and delivery. This begs the question what type of banking organization Syariah rules allow. Is the bank as we know it, dealing in finance, allowable by Syariah? Or what is allowable is really a trading company, but one with access to lots of funds. In other words depositors place their money in banks for them to engage in trades. Malaysia never really addressed this question; it simply assumes an Islamic Bank should operate on the conventional bank model but with non Syariah compliant aspects totally removed. Actually the Middle East also wants an Islamic bank along the lines of a conventional bank with Syariah contradictory aspects removed. However they grapple with the strict interpretation of Syariah whilst Malaysia does not worry itself with strict interpretations. Malaysia considers it over strict. So whats the effect? Malaysia progress speedily with Islamic Banking; the Middle East used other concepts to arrive at the same result. There’s a lot financial engineering in certain parts of the Middle East with dubious interpretation of Syariah to arrive at the same results as Malaysia. So who’s better and who’s worse I really do not want to judge; it is six of one and half a dozen of the other.

If pressed for a stand, I would go for the Islamic bank as a trading company model. Actually we already have such an organization in Malaysia, long before Bank Islam Malaysia came into existence. This organisation collect savings from Muslims and invest in oil palm plantations and manufacturing companies. Every year it declares a dividend. It is really an Islamic Bank but some people prefer to call it Lembaga Tabung Haji.

With this sort of organization we will only have long term depositors, there is no room for short term depositors who wants their money on call. The question is are short term depositing expecting returns Islamic? This concept only flourish with the riba concept of rental of money. If you do not subscribe to rental of money why do you perpetuate the concept of short term deposits with expectation of returns? We really have to deal with the big picture. That’s what happens when you try to apply Islamic rules ad hoc and in instalments when the overall environment and laws are clearly not Islamic. Clearly when Allah commands certain rules they are meant to operate in environments where Syariah law is supreme. At the moment in many countries Islamic banking is not unlike starting to build a surau* in a large casino.


Note ; surau = Malay for musollah or small mosque.

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