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What Is Murabaha in Islamic Banking

What Is Murabaha in Islamic BankingAn astute banker knows that he or she must be able to respond to the needs of the prospective client. This can mean having a recognition of the financial customs and procedures of the region. The global economy provides opportunities but only if a person is familiar with different cultures. Banking in the Islamic world is different than the ordinary methods practiced in the West. It is essential to know exactly what they mean, and how they impact business. Moreover, you may learn more about essay on Islamic banking and finance on our site.

What Is Murabaha in Islamic Banking?

This is actually a sale. The person who is selling will indicate what costs have been incurred on a given asset, and will then sell it to someone else with a profit margin attached to it. The buyer is made aware of the margin as well as the costs, but the actual purchase is made by a third-party. The buyer then pays the intermediary in installments. Murabaha is a type of fiduciary sale known in the Arab world as bayu-al-amanah. This particular type of sale is widely used in Islamic banks.

Why Bother with Murabaha Islamic Banking?

This can be extremely bewildering to any Western banker. The reason for this is centered in Sharia, the holy law of Islam. Sharia forbids the use of usury; the taking of any interest on a loan. In effect, the sale under Murabaha is a form of rent. Sharia has one benefit for the buyer that is not common practice in Western banking. It is forbidden to compensate the intermediary beyond the terms of the contract; that would be considered usury. Consequently, the bank as intermediary cannot charge a late fee if the buyer fails to make the necessary payment on time. The same is true for default. Penalty payments are not allowed.

Murabaha Islamic Banking is Complex

Sharia is not always easy for a non-Muslim to understand. There are restrictions and regulations placed on the practice of Murabaha. The easiest way to practice it is if the bank itself owns the commodity. There are various stages of the process and it can get a little bit complicated as the transaction proceeds. The important thing to remember is that interest cannot be charged at all. Any indication of it will void the entire deal. Once the question of interest not being there has been addressed, the tenets of Sharia are going to take a prominent place. The banker has to keep all this in mind as he or she is working with an Islamic client.

It all can be hard for Western bank to do, but what has to be understood are the advantages for somebody seeking capital. The idea of no penalty fees is extremely attractive, and on top of that is the cultural/religious issue. A Muslim who is in a Murabaha transaction is showing a level of piety and deference to religious law. People in the United States may find that odd, but in the Middle East Islam is taken very seriously. It would be in the interests of any bank to take a very close look at Islamic banking and all of its various components. The Middle East is changing its economy. Oil may soon no longer be the primary source of revenue. Instead, banking may take its place. Knowing as much as possible about Murabaha can perhaps open up some very serious opportunities for a bank. Besides, you may know more about Ijarah in Islamic banking by visiting our site.


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