Is Murabaha an Islamic Mode of Financing?

By Muhammad Rizwan-ul Haque

Founding Chairman, Dawood Family Takaful, CEO of an Investment Bank and Director of a Trust

June 22, 2015

Introduction

This article discusses the concept of Murabaha within Islamic Banking & Finance and raises questions regarding its practical implementation and compatibility with the broader economic objectives of Islam.

Reference to Muhammad Taqi Usmani

The article cites an excerpt from An Introduction to Islamic Finance by Muhammad Taqi Usmani, where it is stated that:

“Murabahah is not originally a mode of financing and not an ideal instrument for carrying out the real economic objectives of Islam.”

The excerpt further notes that Murabaha was intended as a temporary or transitional mechanism where Modaraba or Musharakah arrangements may not be practical.

Analysis of the Concept

The author argues that many Murabaha transactions conducted by Islamic financial institutions function primarily as paper-based arrangements designed to resemble trade transactions, while in practice remaining closely linked to conventional financing structures.

Not a Preferred Instrument

The article highlights that even scholars associated with Islamic finance have described Murabaha as a non-ideal or temporary solution rather than the preferred structure for Islamic economic activity.

Questions Raised by the Author

Why Is Murabaha Widely Used?

The article questions why Islamic financial institutions continue to rely heavily on Murabaha if it is considered a transitional or less desirable structure.

What Corrective Measures Exist?

The author asks whether regulators, scholars, or institutions have implemented measures to gradually reduce dependence on Murabaha-based financing.

Responsibility of Institutions

The article further questions whether responsibility lies with:

• Islamic financial institutions,

• Shariah boards, or

• Regulators overseeing the industry.

Transparency with Customers

The author raises concerns about whether customers are adequately informed regarding the nature and limitations of Murabaha structures.

“Islamic” Labeling

Another concern raised is whether institutions should market themselves as fully Shariah-compliant while continuing to rely heavily on financing structures viewed by some scholars as transitional.

Duration of the “Transitional” Period

The article questions how long Murabaha can continue to be described as a temporary measure and whether any formal roadmap exists toward broader equity-based Islamic financial models.

Profit and Ethics

The author argues that excessive focus on profitability may risk overshadowing broader ethical and socioeconomic objectives emphasized in Islamic teachings.

Conclusion

The article concludes that serious discussion and scholarly engagement are necessary regarding the continued use of Murabaha within Islamic Banking & Finance. According to the author, these discussions are important to ensure transparency, fairness, and alignment with the objectives of Islamic economic principles.

May Allah (SWT) guide us all toward the straight and truthful path. Aameen.

Author Credit:

This article is written by Muhammad Rizwan-ul Haque, researcher and commentator on Islamic economics and finance.