The Islamic financial system is a system that is outstanding in itself. The uniqueness of this system is due to the fact that it is maintained by the Sharia law unlike the convectional financial policies that are used in the other systems. Its operation as a vigorous financial system is because those who practice this kind of financial systems are to a greater extent Islam who treat any religious information with utmost sincerity and follow all the precepts to the latter. This marries with the thought by religion scholars who state that religion is the opium of the masses, feed it to them and they will comply to anything given in the name of religion.
The Islamic financial system is from time immemorial against many other issues gambling, uncertainty, engagement in business with illegal commodities and charging of interest on loaned assets. This system, that involves trade mostly on assets and advocates for returns that are proportionate to the risk that is involved in the business. This is to enable the system to promote justice and welfare for all the traders and consumers of their services as well both in small and expanded businesses. This borrows from the principle that Islam is a religion of peace that promotes equality and fairness to all in all the spheres of life, economic part being inclusive. It is in this respect that the murabaha as a system is instituted to manage the business relations within the Islamic banks.
Scope of work
Islam as a religion advocates for strict conformity with its teachings from all people that considers themselves as subscribers to the religion. The conformity touches on the social, spiritual, economical life of a Muslim. The basis of this paper is the economic life of the Islamic community. This is because the majority of bank operations in other convectional banks are considered halal in the religion, interest charged by non-religious institutions being a major issue. This is because the previously mentioned institutions are very much profit-oriented and therefore they charge interest keenly in almost all transactions to increase their profit margins. This is the reason behind the formation of financial institutions that are in conformity with Islamic laws. The institutions operate with the financial policy of Murabaha which basically operates on the system where the bank is involved in the availing of goods and then disposing them to people in need after an agreement is reached that will ensure that the bank gains a profit but not necessarily in the form of interest.
Mudaraba is a joint business that involves the financier which is usually the bank and the enterprise which is a business person or rather a business enterprise. The banks can decide to invest in a company which is already existing or starts a new business. These two parties agree to work together and share the outcome of their contract which is the profit on agreed terms. The bank usually assumes any losses that may arise while the mudarib get to lose his time and effort that he spends on the business. The financier is also known as Arab-al-mal while on the other hand the business person is referred to as mudarib. Like any other business or contracts, there may be losses, but in this case, the losses can only arise from the capital giver (Arab-al-mal) not unless there exists proof that the other partner has intentionally neglected some of the agreements in the contract thus breaching it. Such actions from the mudarib can cause significant losses to both
This is a trading system where a buyer and a seller are supposed to reach an agreement on the amount of profit s to achieve out of any venture. In this system, the price of a commodity is normally raised thereby enabling the person purchasing it to defer payment (bai-muajal). The Murabaha system in basic terms involves an individual paying for a commodity in installments based on a pre-agreed upon a time of either monthly or weekly basis thereby assuming ownership after the completion of the payment period. This banking system is most convenient for use in countries that are majorly Muslim communities. Some countries that are majorly Muslim have succeeded in instituting Islamic banking systems at national levels. The other pillar of Islamic financial system is thats it is based on the belief that promises made between clients and banks are binding.
The main reason for the use of Murabaha in business is to ensure that charging of interest is eliminated in. This is because, in the Islam religion, the interest that is the charge on loaned cash or commodities is termed as haram and is not acceptable. Over the ages, this system has diversified to the extent that it has availed two distinct forms of murabahah. The ideal one that was simpler in its form and forthrightness and the modern one. However the two share similarity not of their nature but rather on the meanings of the terminologies used therein the modern one is more complex involving three phases as compared to the classical one that had only a single and final phase.
The Murabaha as used today consists of three phases that it goes through before it is actuated. First, the bank and the person purchasing a commodity reach an agreement that the buyer will buy and the seller is willing to sell. This is done to give assurance that after the item is bought by the bank, the customer will purchase it back without defaulting ideally. Secondly, the bank will acquire the goods needed by the customer as per the recommendations of the customer (second contract). The final step (second contract) is arrived at by the bank fixing a marked up price and then selling the asset to the customer on credit that would be paid at an agreed rate of installment.
This financial system involves a contract where the lender purchases of an asset owned by the person borrowing who will later have buy it back at a relatively marked-up price from the lender (negative short sale) while paying in installments pre-agreed upon. The person or firm that is lending can also purchase an asset from another person/ third party perhaps not known to the person borrowing (back to back sale). The final selling price will be determined by the original purchase price which is then marked up to enable the lender to generate some form of profit based on the repayment rates that customary Murabaha cost-plus sales. Some of these include; salam, bai bithaman ajil, istina,musawama and quard al-hasan. In a case where the price is determined independent of the original price, that situation is called the musawamah while where the trader decides to let the buyer know the profit or loss that has been achieved is called the bay al-amanah. Its also possible that good can be sold at its same price thus generating neither a profit for a loss. Such a situation is called tawliya.
Items that are acquired under the contracts of salam and the bai bithaman ajil are permissible of a deferred payment and the delivery of the assets. Salam, on the other hand, creates a kind of financial dealing that is common to the other convectional systems and a times is viewed to be outside the normal practice of Murabaha.
In a situation where someone delays to make a payment in time, a seller is not permitted to charge the buyer for late payment. In the ideal Islamic situation, in a true murabahah, the price of the item was sold is fixed solely o the commodity and is not subject to change with time unless the size of the commodity is also changing. However, scholars argue that people have undertaken to misuse the grace extended by murabahah where people now deliberately decide not to payback what they owe in time. Murabaha requires that individually someone provide the honest declaration of cost, sales of cost, and sales at the specified loss.
Developed Islamic states like the Saudi Arabia for instance through the state's bank called the National Commercial Bank has introduced an Advanced card that is prepaid in nature to evade the issue of accruing interests that normally come with the normal credit cards. Apart from the card being Shariah compliant, it also has other benefits that come with to enable people to make it a preference over the credit card that is anti- Islam.
Its quite impressive that even countries that are not dominated by Islam like the UK had undertaken to issue the license to pave the way for the establishment of a financial institution that shall be named Islamic Bank of Britain. The United States of America to has not fully ignored the Islamic financial system as it has hired an Islamic Banking expert to work together with the department of treasury in to infuse the Islamic Finance.
Positive analysis of Murabaha as a financial system
This is similar to the convectional system in other non-Islamic banks and firms that offer hire purchase where the lender retains the ownership of the commodity sold until the time when the buyer would have completed the payment. Murabaha functions to finance the buying of an item without actually meeting the additional charges that come in the form of interest, which is view as usury, is not allowed within the Muslim community and is considered haram. Even though this kind of financial system may appear almost similar to the normal systems that charge interests on loans, there is are many differences between them and are not the same.
In Murabaha, the person buying or borrowing pays to the person selling or loaning a higher price but not necessarily an interest at the same time being careful not to make extortion out of the person buying, the amount gained regarding profit must be within a religiously acceptable range. The person selling usually is in full control of the commodity on sale and must ensure that it is delivered safely upon exchange of ownership with the buyer. Any defect on the good before exchange of ownership is usually the liability of the seller. Some scholars tend to hold that the seller ay fine the buyer by charging a little extras fee than the amount earlier agreed upon in case the buyer submits the payment late. However, this is a disputed argument where others also hold that the extra amount charged should not benefit the seller but should be rather donated as goodwill.
Criticism and challenges of Murabaha as a financial system
Independently minded scholars whose line of argument are in favor of the Islamic system of having over the time asserted that the misuse of Murabaha as a sales agreement system is slowly shifting the Islamic financial system toward a different situation. They state that the universal situation where the financial system deployed ensures that somehow both the customer and the seller both split some cost of profit and loss on either side. The people who are anti Murabaha actuate that it creates the conveyor belt of cash between the financial institutions, intermediaries and actual customers seeking financing services this in itself ensures that there is the actual business that should involve buying and selling of items. They may be right since Murabaha when conducted, as it should have lesser risks that are involved in it and creates the best money liquidity ratios.
Even though the Islamic institutions are currently operating under pressure that arises from other financial institutions that are more established. The other firms that are not sharia compliant therefore normally format products that have a permissible risk-return formula that operates from a business point o analysis. To counter this, its necessary that the businesses that are sharia compliant to also replicate the packages by all legal and financial engineering techniques thereby achieving the universal economic and the general market requirements. The use of such products normally dilutes the sharia principles. However, the...
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