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Murabaha in Auto Finance and Shariah Advisory Board Case Study

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Updated: May 13th, 2021

Introduction

Fatwa (also written as FATWA) is a legal pronouncement in countries that have an Islam-based system of law. This legal pronouncement is usually issued by an expert in religious law, a mufti. In order to be valid and active, a fatwa needs to comply with the rules and principles of the Shariah or Islamic law. The fatwa chosen for this paper is the Murabaha mode, a specific contract used, in this case, for auto finance and regulation of purchased vehicles by the client and the bank. The Murabaha might vary depending on the contract and the product purchased. Nevertheless, it is one of the most common modes of financing in Islamic banks.

Operation/Modus Operandi

The Murabaha in auto finance functions in the following way: the client signs an application with the bank about a product, in this case, a vehicle, that he wants to purchase. Perse, it is not yet a contract for purchasing but rather a contract that regulates the bank’s financing of a purchase that the client needs. Together with the application form the client also executes a Promise (under the rules of the Murabaha) that he will purchase the vehicle if the bank (RAKBANK) acquires it or is in possession of this vehicle.

The bank obtains the vehicle from an owner (or seller) by executing a Sale and Purchase Agreement. If the agreement is followed correctly by both sides and the sale is completed, the bank becomes the owner of the vehicle.

Once the bank becomes the owner of the vehicle, the customer who issued the Promise to Purchase this vehicle needs to buy it under the Murabaha mode’s regulations. These regulations state that the client will purchase the vehicle by paying the sale price which includes the cost of the vehicle and the profit for the bank. Such payment is scheduled for a specific payment day. If the client fails to purchase the vehicle on the due day, the bank remains to be its owner.

Although not mentioned in the Fatwa/Sharia pronouncement, the bank assumingly might have the right to blacklist clients who failed to purchase the vehicle from future purchases under the Murabaha mode. As the acquisition consists of two steps, two different contracts are used for it: Sale and Purchase Agreement or Local Purchase order (between the bank and the owner of the vehicle) and the Murabaha Agreement (between the bank and the client who aims to buy the vehicle).

As mentioned in the fatwa, payment is transacted on a specific date or date. The latter factor indicates that the payment can come in installments; therefore, it is necessary for the bank and the purchaser to establish the dates for each installment. The use of the Murabaha mode is necessary because Islamic banks cannot operate on the basis of interest or lend money to customers within specific agreements as Islamic law prohibits it due to the established ban on loans in Islam. Thus, the banks use the Murabaha mode as it contains a flat fee instead of loans.

Conclusion

The Murabaha is a fatwa that regulates the purchase of goods and products (vehicles, in this case) under Islamic religious law. In the Murabaha, the bank acquires the vehicle, and the client purchases it from the bank by paying the sale price that consists of the cost of the vehicle and the profit for the bank in a flat fee. The Murabaha is one of the most common modes of financing.

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IvyPanda. (2021, May 13). Murabaha in Auto Finance and Shariah Advisory Board. Retrieved from https://ivypanda.com/essays/murabaha-in-auto-finance-and-shariah-advisory-board/

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"Murabaha in Auto Finance and Shariah Advisory Board." IvyPanda, 13 May 2021, ivypanda.com/essays/murabaha-in-auto-finance-and-shariah-advisory-board/.

1. IvyPanda. "Murabaha in Auto Finance and Shariah Advisory Board." May 13, 2021. https://ivypanda.com/essays/murabaha-in-auto-finance-and-shariah-advisory-board/.


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IvyPanda. "Murabaha in Auto Finance and Shariah Advisory Board." May 13, 2021. https://ivypanda.com/essays/murabaha-in-auto-finance-and-shariah-advisory-board/.

References

IvyPanda. 2021. "Murabaha in Auto Finance and Shariah Advisory Board." May 13, 2021. https://ivypanda.com/essays/murabaha-in-auto-finance-and-shariah-advisory-board/.

References

IvyPanda. (2021) 'Murabaha in Auto Finance and Shariah Advisory Board'. 13 May.

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