The resurfacing of Islamic banking represents one of the important characteristics of Islamic resurrection in our time. Many conventional banks are ascertaining that Islamic banking is not as complicated as the name may sound. In response to the increasing demand from its clients, numerous conventional banks started offering interest-free banking products in the last 5 years. Most popular of the Islamic Bank products is the Murabaha, where the bank takes constructive ownership of assets and then re-sell on differed payment with a mark-up. Murabaha, which is in trend now-a-days in automobile and housing finance, is not very divergent to bank lending, and actually creates comparable bank assets
Murabaha is the bastion mode of finance in Islamic banking. Because the prohibiting of interest is very serious in Islam, force to innovate new banking products is very strong. This is one area where Islamic banks are quite notable.
Many Islamic commercial contracts such as Mudarabah, Musharakah, and Murabaha have been revitalized. Murabaha is explicated in Google as a law where the seller specifically talk about the cost he has incurred on the commodities for sale and sells it to another person by adding some revenue or mark-up thereon which is known to the buyer. So, it means that it's up to buyer whether to buy the material or not after knowing that the cost was added.
The Islamic banks have gained specific applause for their product Murabaha. The banks have gained outmost prosperity with this particular product. The Islamic banks have earned mark up profits and expect more in the years to come.
Murabaha is selling a commodity as per the purchasing price with a defined and agreed profit mark-up .This rack up may be a percentage of the selling price or a lump sum. This operation may be accomplished either without a previous promise to buy, in which case is called an ordinary Murabaha , or with prior promise to buy submitted by a person concerned in acquiring goods through the institution, in which case it is called a " banking Murabaha " i.e. Murabaha to the purchase prearranged. Murabaha is the most extensively used mode of finance in almost all Islamic Banks. In some Islamic Banks, Murabaha comprise more than 90% of total assets of the bank. It does have apparent advantage which makes it very analogous to lending in conventional banking. It is because of this Murabaha is now becoming a mode of finance accomplished even by convention banks. Murabaha contracts allow customers to purchase raw materials, capital goods and other consumables from local and international markets. These goods are first bought by BisB for its account on orders of the customers by paying cash or through LC as the case may be and then sold to the customers with profit margin on postponed payment basis. Payment on postponed basis can be made to the bank in installments or in one lump sum amount.
On the contrary, to what many people think, Murabaha is not new. It is one form of sale contract, which is known in Islamic Shari'ah for hundreds of years, although, not accurately the same from banks practice now. Murabaha is the old was a easy sale contract, where a mark-up is negotiated between the parties and calculated on the basis of cost of purchase of the seller. Never the less Murabaha in modern Islamic banking present an fascinating case of financial engineering where this simple sale contract was developed into a alternate for bank lending. Because banks are not "merchant", goods are assets that can be subject to Murabaha are not owned by the bank when client wishes to buy them. One resolution would be for the bank to sell first and then prepare saves goods from the market. This however, is not allowable from Shari'ah point of view. Islamic banks opted for obtaining an "obligation to purchase" from the client. One may say: if such obligation is binding, then it is a people to contracting for sale, and if it is contract not a valuing promise. The client is not obligated to buy; rather he is obligated to credit his promise. If the bank, relying on such promise, bought these good and the client decides not to go ahead with the purchase bank will then sell same to a third party. If a loss is made, then the bank will have recourse to that client since the loss was caused by the promise. Only actual loss is considered and no costs of funds are accounted for. A Murabaha is a differed payment sale.
Profits to the bank are fundamentally the differentiation between the purchase price, which in cash, and the deferred sale price. This difference are very closely- related to the going interest rates which occasionally makes people suspect of Islamic banking. However, they are not the same. The mark-up in Murabaha is part of a sale price, it is set only once and then it is does not change overtime. The bank can calculate the price (cost-plus), in any way, even basing such computation on the going LIBOR. Once, it is set, it can't be changed even if the client defaulted on his debt or was aberrant. While principal is easily distinguishable from the mark up, such distinction should remain an accounting exercise. Murabaha is a sale contract, the price is just one amount and, contractually, it should be always treated subsequently. The principle of Murabaha is the most widely used principle among Islamic banks. IBB of Bahrain for example, channeled 96% of its financing activities in form of Murabaha. Other banks with high percentages of Murabaha are 85% for DIB of United Arab Emirates, 61% for FF1 of Turkey, and 51% for IBBL of Bangladesh. However, the percentage of Murabaha for BIMB of Malaysia was less than 20%.
Research Questions and Objectives
Research objectives
To identify the effectiveness of Murabaha in performing functions of Islamic Banks.
To explore the possibility of implementing Murabaha in other conventional banks.
To explore the possibility whether Murabaha is able to create interest free banking system in the economy.
Research questions
How effective is Murabaha in Islamic Banking system?
Can Murabaha be implemented in other conventional banks?
Can Murabaha create interest free banking system in the economy?
Research Methods
Since my proposed research depends highly on interacting with the public and the people of the society, I intend on carrying out my research by gathering as much opinions as possible through distributing a questionnaire, performing interviews with specialists asking them on their thoughts about the effectiveness of Murabaha in Islamic banks in the kingdom, as well as interviewing ordinary people from the public, gathering their thoughts and ideas on the role of Murabaha in the banking system. The variety of the public's opinion makes me curious to find out what people think about Murabaha. I also intend on performing an experiment through a workshop, by gathering a random number of people, and after explaining to them the meaning of Murabaha and giving them a general idea about the topic, I plan on making them experience the effects of Murabaha and make critical decisions on how the public's money should be spent using assumed figures. At the end of the workshop I would gather the feedback, whether it's a positive or a criticizing feedback, it would help me come out with an outcome and form a conclusion to the topic.
Resources
The resources needed to conduct this research will be through the access of data from various ways; those resources will be research articles and literature reviews, books and previous studies, not to forget about the data collected for analyzing the questionnaire and the feedback obtained from the workshop.
Also a certain budget has been set to cover costs associated with the research; such costs will be like the cost of analyzing data, the cost of conducting the workshop, the cost of traveling and transportation, the cost of printing and binding the research, and finally not to forget about the cost of time needed.
