Islamic Banking, is it Islamic?

Dr. Khalid Zaheer

Question: Could you please explain briefly, the difference between murabayhah (Cost-Plus Financing) and bay‘ mu‘ajjal (Deferred Payment Contract), that are used in connection with Islamic Banking. Are they the same? I just could not get the difference between the two.

 

Answer: Because the proponents of Islamic banking have been obsessed with the idea of portraying Islamic-appearing, Arabic expressions for the products they proposed (which was an unnecessary exercise, at times even deceptive), they borrowed these two expressions (i.e. murabahah and bay‘ mu‘ajjal) from the works of the earlier jurists.

Murabahah, as found in the earlier works, was simply a sale transaction in which the seller used to disclose the cost at which he bought the commodity and mentioned to the prospective customer, the profit (ribh) he proposed to add. bay‘ mu‘ajjal, on the other hand, was simply a credit sale transaction. Our contemporary architects of Islamic banking merged the two by ingeniously borrowing cost plus element of murabahah and delayed payment element of bay‘ mu‘ajjal. Even though both these arrangements were perfectly legitimate in their original classical forms, their illegitimate marriage has resulted in a hybrid that is a very good example of riba, even though it is jealously defended (for understandable reasons) at every forum of Islamic banking. The end result is that all neutral, unbiased observers are left wondering as to what then is wrong with riba if this murabahah/bay‘ mu‘ajjal arrangement is okay. All people I have met, who have no “ideological commitment” to Islamic banking, unanimously agree that if there is any difference between riba (interest) and murabahah/bay‘ mu‘ajjal, at least an ordinary intelligent person cannot figure that out. Despite this utter confusion, Islamic banking flourishes. Good luck to it!

I would want to know what the modern understanding of both these terms is. I have often tried to unsuccessfully understand the difference. Beyond semantics, I haven’t found anything.

 

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