Murabaha

CategoriesTrade, Business & All Things Money [467]

Is it permissible to buy a house from a bank when it has been taken over and possessed by the bank and then they sell it directly without a third party involved? They still charge interest but there are only two parties involved so it is murabahah and not paying interest for a loan because the bank is the owner and the seller at the same time.

In the name of Allah, Most Compassionate, Most Merciful.

Answer:

The word murabahah in Islamic jurisprudence refers to that transaction in which the seller and the purchaser agree a price of a commodity based on the original price paid with a certain profit added. (Hidayah, Vol 3, P70)

The fundamental point in this transaction is that the seller discloses the original price paid and then adds his profit on top. However the word murabahah nowadays is used as a form of finance provided by the banks.  Mufti Taqi Usmani in his book “An Introduction to Islamic finance” has written in detail around this subject. He states that a financial institution must adopt the following procedure:
Firstly: The client and the institution sign an over-all agreement whereby the institution promises to sell and the client promises to buy the commodities from time to time on an agreed ratio of profit added to the cost. This agreement may specify the limit up to which the facility may be availed.

Secondly: When a specific commodity is required by the customer, the institution appoints the client as his agent for purchasing the commodity on its behalf, and an agreement of agency is signed by both the parties.

Thirdly: The client purchases the commodity on behalf of the institution and takes its possession as an agent of the institution.

Fourthly: The client informs the institution that he has purchased the commodity on its behalf, and at the same time, makes an offer to purchase it from the institution.

Fifthly: The institution accepts the offer and the sale is concluded whereby the ownership as well as the risk of the commodity is transferred to the client.
All these five stages are necessary to effect a valid murabahah. If the institution purchases the commodity directly from the supplier (which is preferable) it does not need any agency agreement. In this case, the second phase will be dropped and at the third stage the institution itself will purchase the commodity from the supplier, and the fourth phase will be restricted to making an offer by the client.

The most essential element of the transaction is that the commodity must remain in the risk of the institution during the period between the third and the fifth stage. This is the only feature of murabahah which can distinguish it from an interest-based transaction. Therefore, it must be observed with due diligence at all costs, otherwise the murabahah transaction becomes invalid according to Shariah.

It is also a necessary condition for the validity of murabahah that the commodity is purchased from a third party. The purchase of the commodity from the client himself on ‘buy back’ agreement is not allowed in Shariah. Thus murabahah based on ‘buy back’ agreement is nothing more than an interest based transaction.” (P107-P108)
In regards to your question if you mean by “taken over and possessed by the bank” as that the bank has repossessed the house due to defaulting in payments from a third party, not the proposed purchaser, then in this situation it will be permissible to buy the house from the bank as the bank is the owner and therefore there is no need for an agency (third party) agreement. It is imperative that there is no interest involved and the above procedure as described above is followed

Only Allah knows best.

Sayeedur Rahman

Darul Ifta, Birmingham

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