Some exciting Economical developments have taken place in the area of Islamic finance during the preceding two years. There has been a fast expansion in its market share, diversification of products picked up pace and the rapid globalization of the services ensures their future expansion. Commodity murabahah is one of the most commonly used financing contracts in Islamic banking. But of no less consequence may prove, the lurch one finds commodity murabahah in at the close of 2008 (Hasan 2009) . Commodity Murabaha is clearly the Islamic treasurer’s funding product of choice, as it is flexible enough to facilitate many structures for financing, hedging, and currency exchanging. It is time to apply the shari'ah objective of “sa’dd-aldharai” that closes the potential avenues for outwitting the shari’ah objectives and spirit .Islamic Economics; commodity murabahah; Time share in price; Shari’ah objectives; Bai al Inah, Commodity Murabahah House (Suq Al-Sila), Commodity Murabahah Program (CMP) , deferred contracts, GCC, IIMM , Islamic Banking Scheme (IBS ); “sa’dd-aldharai”

Alsayyed, Nidal

English

Research Papers in Economics

THE GLOBAL UNIVERSITY IN ISLAMIC FINANCE (INCEIF) 
The Uses and Misuses of Commodity 
Murabaha: Islamic Economic Perspective  
 
 
 
 
 
 
NIDAL A ALSAYYED 
PhD Researcher Islamic Economics, Banking, and Finance 
http://groups.google.com/group/nidal_islamic-finance 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January, 2010 
 Commodity Murabaha: Uses and Misuses  2009 
 
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The Uses and Misuses of Commodity Murabaha:  
Islamic Economic Perspective 
 
INCEIF: The Global University in Islamic Finance, Kuala Lumpur 
E-mail: nslsayye@iit.edu                  Telephone: + 6017 2559 700 (HP) 
 
Profile:  NIDAL ALSAYYED (http://ideas.repec.org/f/pal399.html) 
--------------------------------------------------------------------------------------------------------------------- 
ABSTRACT 
 
Some exciting Economical developments have taken place in the area of Islamic 
finance during the preceding two years. There has been a fast expansion in its 
market share, diversification of products picked up pace and the rapid 
globalization of the services ensures their future expansion. Commodity 
murabahah is one of the most commonly used financing contracts in Islamic 
banking.  But of no less consequence may prove, the lurch one finds commodity 
murabahah in at the close of 2008 (Hasan 2009)
1. Commodity Murabaha is 
clearly the Islamic treasurer’s funding product of choice, as it is flexible enough to 
facilitate many structures for financing, hedging, and currency exchanging. It is 
time to apply the shari'ah objective of “sa’dd-aldharai” that closes the potential 
avenues for outwitting the shari’ah objectives and spirit . 
KEY WORDS 
Islamic Economics; commodity murabahah; Time share in price; Shari’ah objectives; Bai al 
Inah, Commodity Murabahah House (Suq Al-Sila), Commodity Murabahah Program (CMP)
2 , 
deferred contracts, GCC, IIMM
3, Islamic Banking Scheme (IBS
4); “sa’dd-aldharai” 
                                                           
1 A special online report titled “Commodity Murabahah remains in the lurch”, by Professor Zubair Hasan, Islamic 
Finance (Malaysian reserve); January 2009. 
2 Commodity Murabahah Program (CMP) was introduced by Bank Negara Malaysia to facilitate liquidity 
management and investment purposes. CMP is a cash deposit product which is based on principle of Tawarruq. It is Commodity Murabaha: Uses and Misuses  2009 
 
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INTRODUCTION 
 
The most pronounced difference between Islamic financing and existing equivalent 
products is the prohibition of interest. This is based on the principle that it is 
unacceptable in and of itself for same commodity, including money, to increase in value 
merely by being lent to another person. However, Shari’ah does not prohibit the making 
of a return on capital if the provider is willing to share in the risks of a productive 
enterprise [Hasan Zubair, 2007].  
Commodity murabahah is one of the most commonly used financing contracts in Islamic 
banking. It falls in the same generic category of “Bai Al-Amanah” branched from the 
major category of "uqud al-mu'awadhat" (exchange contracts) that covers all types of 
transactions including most sukuk as well. 
 
However, first Sheik Taqi Usmani declared early in the year that bulk of the sukuk 
issued in the market defied Islamic norms. 
On the heels of this pronouncement came some court decisions involving deferred 
contracts going against Islamic banks in Malaysia. 
 
Basic (True-trade) Murabahah
5: The bank buys certain tangible asset and sells it to 
the client, who wants to own this asset. 
 
                                                                                                                                                                                           
designed to be the first ever commodity-based transaction that utilizes the Crude Palm Oil (CPO) based contracts as 
the underlying assets. CMP transaction with Bank Negara Malaysia was first auctioned competitively in the IIMM 
on 14 March 2007 
3 Islamic Inter-bank Money Market (IIMM) the first short term intermediary market in the world established by 
Malaysia (January 3, 1994). 
4 For detailed descriptions of the available instruments, refer to http://iimm.bnm.gov.my . 
5 There are several common variations of the Murabahah contract practiced by modern Islamic banks. These 
include the simple Murabahah, agency Murabahah, Murabahah to purchase order, Tawarruq and Bai al Inah. 
These variations are widely used for trade and pre-export finance. Agency Murabahah and Murabahah to purchase 
order are common tools for trade finance. Commodity Murabaha: Uses and Misuses  2009 
 
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The developments have put the common man a quandary; it is being increasingly 
asked: Does commodity murabahah violate Islamic norms? The answer is: in principle it 
does not. Commodity murabahah falls in the same generic category of "uqud al-
mu'awadhat" or exchange contracts that covers all types of transactions Islam allows. 
In exchange contracts a given quantity of one commodity is traded for a given quantity 
of another commodity, including money. 
USES OF COMMODITY MURABAHAH (Structural Strengths and 
weaknesses) 
 
Murabahah
6 – Basic price plus profit: A financial institution in Murabahah financing 
purchases the goods for the customer and re-sells them to the customer on a deferred 
basis, adding an agreed profit margin. 
The customer then pays the sale price for the goods either in installments or on lump 
sum basis at the end of the period. There are three sub products of this product – Basic 
(True Trade Murabahah), Commodity Murabahah
7 and “Bai al Inah”.    
The money value of a commodity is called its price. The delivery of a commodity and 
the payment of price may be simultaneous (i.e. on the spot or the obligation of one of 
the parties may be deferred to a future date . 
Commodity murabahah belongs to the "deferred contracts" group. A client may, for 
example request his bank to purchase a car for him on a cost plus basis. Cost here 
refers to the cash payment for the car the bank makes to the dealer and plus implies the 
addition of a profit margin the customer agrees to allow the bank for late payment. 
 
                                                           
6 Murabahah (ةحبارملا): Literally it means a sale on mutually agreed profit. 
Technically, it is a contract of sale in which the seller declares his cost and the profit. 
This has been adopted by Islamic banks as a mode of financing. As a financing technique, it can involve a request 
by the client to the bank to purchase a certain item for him. The bank does that for a definite profit over the cost 
which is stipulated in advance. 
 
7 Commodity Murabahah: The bank buys a certain commodity from a broker and sells it to the client, who does 
not want to own the commodity, so he sells it to another broker to get cash. Commodity Murabaha: Uses and Misuses  2009 
 
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We find the arrangement per se does not contain any element of interest. Islam does 
not grant a time value for money in contracts if money were exchanged for money that 
is the basis of banning interest. 
However, the addition to cost or markup in commodity murabahah is allowed on the 
ground that "time has a share in price" (lil zamani hazzun fil thaman). 
Indeed, it is this juristic pronouncement that constitutes the justification for allowing the 
deferring of obligations in Islamic contracts. 
Even the courts may not have thrown out the cases alluded to above on pure juridical 
basis; the structuring of contracts was probably to blame. 
It follows that the causes of current discomfiture have to be sought elsewhere. 
We need not travel far
8.  
"Such permission however, was granted in order to facilitate under difficult 
circumstances, the figurative turning of the wheels of those institutions when they were 
few in number (and short of capital and human resources). 
 
"It was expected that Islamic banks would progress in time to genuine operations based 
on the objectives of an Islamic economic system and that they would distance 
themselves even step by step, from what resembled interest based enterprises. 
"What is happening at the present time, however, is the opposite Islamic financial 
institutions have now begun competing to present themselves with all the same 
characteristics of the conventional banks, interest-based market place, and to offer new 
products that march backwards towards interest-based enterprises rather than away 
from them”. 
                                                           
8 There is a candid in the statement of Sheikh Taqi Usmani that I quote him. He wrote: 
"Undoubtedly, shari’ah supervisory boards, academic councils and legal seminars have given permission 
to Islamic banks to carry out certain operations that more closely resemble stratagems than actual 
transactions”. 
 Commodity Murabaha: Uses and Misuses  2009 
 
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MISUSES OF COMMODITY MURABAHA 
 
There are two alternative forms of “Murabahah” applied to generate working capital for 
businesses and consumer credit. These are called Bai al Inah
9, which is used in 
Malaysia, and Tawarruq (Commodity Murabahah)
10, which is common in the GCC (Gulf 
Cooperation Council).  
 
These methods are generally disliked by Islamic scholars, who prefer that businesses 
and consumers use less contrived methods to finance their activities. These two forms 
of credit are more clearly parallel to traditional loans and may be structured to have 
“rate” resets, rollovers and to accommodate late payment recoveries. 
 
"Often times these products are rushed to the market using Ploys that sound minds 
reject and bring laughter to enemies". 
The observation is disquieting.  The jurists at all levels must realize what injury one  
may inflict on the Islamic positions if interpretations of the facility principle rely on 
stretchy, irreversible presumptions. 
Shari’ah scholars sometimes open the cork to let the Jinn out only to lament later that 
the monster is difficult to put back into the bottle. Efforts are needed to avoid juridical 
divisions that have already begun to surface on the issue. 
The bank managers’ eagerness to expand the market fast presumably also contributed 
to the lapse on the Shari’ah front. Islamic finance is no longer seen much different from 
other businesses operating in the economy. 
 The Islamic economic system has social implications related to economic development  
especially for the fulfillment of basic needs and achieving distributional equity. 
                                                           
9 The bank sells its asset to the client (on credit), whom immediately sells back the same to the bank (on cash 
basis) and obtains the sum that he seeks. Bai al Inah only involves two parties while commodity Murabahah 
involves more than two. 
10 Tawarruq = also referred to as “Reverse Murabahah”, “Double Murabahah” and “Commodity Murabahah Commodity Murabaha: Uses and Misuses  2009 
 
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Islamic banking operations are not contributing to these goals; they are essentially 
guided by profit considerations. 
 
CONCLUSION AND FUTURE OUTLOOK 
 
Admittedly, profit is important, rather imperative, but cannot be the sole criterion in 
evaluating their performance. 
Like mainstream banks, they too are diverting the savings of those at the lower rungs of 
society to the richer classes. Researches in the direction of the uses of funds may prove 
rewarding. In addition the distribution of earnings between the owners of banks and the 
depositors especially the smaller ones, may be found much skewed in favor of the 
former.  
Commodity contracts may not individually defy the Shari’ah norms, but their 
overwhelming use is worrisome. Naturally, debt transactions dominate the scene at the 
cost of real economy. The use of deferred contracts seems to have already been 
carried too far. Of late, even Tan Sri Dr Zeti Akhtar Aziz, the illustrious governor of Bank 
Negara Malaysia has advised Islamic banks to curb the temptations of using fixed return 
transactions. Presumably it is time to apply the sharia’h objective of “sadd-aldharai” 
that closes the potential avenues for circumventing the shari’ah:  more so its objectives 
and spirit. 
 
It is not the permissibility of murabahah contracts per se but their indiscreet use and 
faulty structuring -- guaranteeing in many cases not only a fixed profit rate bench 
marked on interest but also the return of the principal through buy-back provisions - 
which is fueling the perception that from Islamic banks interest is out but interest is in; it 
only walks in an Islamic cloak (Hasan 2009). 
 
 
 Commodity Murabaha: Uses and Misuses  2009 
 
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YEAR   2007 RM,000  2008 RM ,000  Average%  
BBA   6,537.602.00  6,511,849.00  8.4  
Ijarah   39,763.00  98,984.00  5.3  
Ijarah Muntahia Bittamlik  307,269.00  216,602.00  6.2  
Mudarabah   21,994.00  21,316.00  3.9  
Murabaha   1,102,177.00   5,911,259.00   50.9  
Musharakah  50,000.00  50,000.00  7.5  
Bai-Al-Inah cash note  813,672.00  1,061,477.00  5.1  
Bai-Al-Inah  140,304.00  182,882.00  8.9  
Istisna'  190,241.00  633,533.00  3.1  
Others  38,540.00  29,540.00  2  
Total  9,041,562.00   10,917,462.00   100%  
 
 
 
 
 
 
 
 
 
 
Bibliography 
 
Commodity Murabahah Program for Liquidity Absorption
Commodity
Broker B
Central Bank
of Malaysia
Commodity
Broker A
Bank A
(1)
(3)
(2)
Source: [15]Commodity Murabaha: Uses and Misuses  2009 
 
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Al-Attas, Syed Muhammad Naquib (1989):   Islam and the Philosophy of Science, 
International Institute of Islamic Thought 
and Civilization, IIUM Kuala Lumpur 
 
Hasan, Zubair (1988)  Islamic Banking at the Cross Road: Theory versus. Practice, in 
Munawar Iqbal (ed.) Distributive Justice and Need Fulfillment in 
an Islamic Economy, Islamic Foundation, UK Chapter 1, pp. 35-
62. 
 
A.L.M. Abdul Gafoor, 2001  "Mudaraba-based Investment and Finance", 
http://users.bart.nl/~abdul/article2.html ,  see also ISLAMIC 
BANKING & FINANCE, , http://users.bart.nl /~abdul / . 
 
Abdullah M Noman, 2002  "Imperatives of Financial Innovation for Islamic Banks", 
International Journal of Islamic Financial Services, Vol.4, No.3, 
http://islamic-finance.net/Journals/Journal15/vol4no3art1.pdf . 
 
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perspective: the case of Egypt, Iran and Pakistan". Review of 
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http://econpapers.repec.org/article/tafrmdest/v_3A1_3Ay_3A2003
_3Ai_3A1_3Ap_3A37-70.htm . 
 

The Uses and Misuses of Commodity Murabaha: Islamic Economic Perspective

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