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The Fatwa / Sharia pronouncement chosen for a case study literature review addresses the process of financing the purchase of a car (“Auto Finance (Murabaha)”). Approved by the Fatwa and Sharia Supervisory Board of Rakbank, this process is as follows: a customer contacts the bank and requests to finance the purchase; the bank demands that the customer promise to purchase the desired car from the bank for an established price, then the bank purchases it from the seller, and sells to the customer. To further analyze this modus operandi known as Murabaha, three aspects need to be addressed; the general meaning in terms of Islamic finances, the promise to purchase, and the debate around such operation.
Operation / Modus Operandi
First of all, Murabaha is a widespread form of providing financial services in Islamic financial institutions. Hanif states that this form of services incorporates the cost-plus-profit purchase agreement and suggests that a bank delivers the product a customer (in this case acting as the ultimate buyer) wants to be delivered instead of providing the customer with funding for purchasing the desired product (169). According to Beck et al., the meaning behind this modus operandi is to avoid making a return on money lending (434); since usury, according to Sharia, is sinful and prohibited, such avoidance is one of the pivotal elements of Islamic banking and the operation of Islamic financial institutions.
Further, relevant literature stresses the importance of the promise to purchase as a necessary element of entering into an agreement of the addressed type. El Massah and Al-Sayed suggest that such a promise signed between the buyer and the bank before the bank purchases the desired product is a crucial element of risk aversion in Islamic finance (52). However, Mohieldin argues that the promise to purchase may not be part of Murabaha contracts (5); there is an alternative type of such contracts, and the terms and conditions may provide for the bank’s responsibility to make a product available for sale without requesting any prior promises or imposing any regulations on the customer.
Finally, it is noteworthy that the described modus operandi is not specific to auto loans (or, to be more precise, auto finance); it may apply to financing the purchase of various assets, including commercial equipment (Haltom 15). The Murabaha operation is widespread and constitutes a large portion of Islamic banking and finance volume; however, critics have claimed that this operation is “a distinction without a difference” (Haltom 17).
The criticized aspect of Murabaha is that it avoids interest but, in fact, operates in a framework in which the customer pays more than the product would cost in case it was bought directly, and the bank keeps the remainder, which can be interpreted as interest. On the other hand, a noteworthy difference is that Murabaha does not imply extra charging (Hanif 169); i.e., unlike in conventional banking, in Islamic banking, the customer is not charged with interest for any extra periods.
Murabaha is a widespread type of concluding contracts in Islamic banking that allows avoiding interest-based operation, and a crucial aspect of this modus operandi is the customer’s promise to ultimately purchase the product and assume ownership. It has been argued that Murabaha does, in fact, feature interest but in a modified form. However, Islamic financial institutions, including Rakbank, mostly disagree and continue to use it heavily for such operations as financing purchases of vehicles.
“Auto Finance (Murabaha).” Rakbank. 2017. Web.
Beck, Thorsten, et al. “Islamic vs. Conventional Banking: Business Model, Efficiency and Stability.” Journal of Banking & Finance, vol. 37, no. 2, 2013, pp. 433-447.
El Massah, Suzanna, and Ola Al-Sayed. “Risk Aversion and Islamic Finance: An Experimental Approach.” International Journal of Information Technology and Business Management, vol. 16, no. 1, 2013, pp. 49-77.
Haltom, Renee. “Islamic Banking, American Regulation.” Econ Focus, vol. 2, no. 1, 2014, pp. 15-19.
Hanif, Muhammad. “Differences and Similarities in Islamic and Conventional Banking.” International Journal of Business and Social Science, vol. 2, no. 2, 2014, pp. 166-175.
Mohieldin, Mahmoud. “Realizing the Potential of Islamic Finance.” Economic Premise, vol. 77, no. 1, 2012, pp. 1-7.