Thread by @SafdarAlam

THREAD

What is Murabaha?

This is the most basic contract in Islamic banking, and if you REALLY understand this, then you WILL understand the vast majority of activity in Islamic banking.

If you think you “understand” CM, then please think again.

If you are unable to write a 50,000 word paper covering all the elements of CM (commercial, risk, legal, Shariah, operational, pricing, execution etc) then you probably do NOT understand CM as well as you think you do!

Ok first let us start with simple Murabaha.

This is a sale transaction where the seller discloses his cost ie how much he paid to acquire the item.

Normal sale transaction:

And in order to make this into a Murabaha transaction, the bank must disclose how much it paid to buy the car:

Ok, now banks do use this Murabaha structure to deliver some asset based financing.

For example Bank Islam in Malaysia uses this to finance car purchases:

So, you choose the car you want, then you go to the bank, arrange financing, the bank buys the car (according to your order, hence it is called “Murabaha to the Purchase Orderer” here.

Then the bank sells the car to you, while disclosing how much it paid for the car (which you knew already, right?), and then agrees to sell the car to you for……how much?

They simply use a relevant interest rate:

Ok, so this is not Riba, as it is “profit” on sale. The bank buys the car from the dealer for, say 10k then sells the car to you for 12k, and you repay in instalments. The profit for the bank is 2k.

This is fine, right? This is profit, not Riba.

This is genuine trade, right?

Well the first problem you have is that you are breaking AAOIFI rules on Murabaha.
Before the bank buys the car, it will request a promise from you, that you will purchase the car from the bank. Then the bank goes ahead and buys the car.
Read step 1 here - Wa’d = promise

So, the Wa’d will say something like:

“After you (the bank) purchase the car from the dealer, I agree to buy the car from you for a price of 12k, payable in instalments”

So, where does this price of 12k come from – this is simply the full repayment of the financing required

required based on the interest rates already disclosed above, right?

So the purchase price in the promise, is calculated as a function of time, right?

This is what AAOIFI has to say about this, in a Murabaha transaction:

Hmm, I wonder if an interest rate has any connection with LIBOR, or a time factor. What do you think?

OK, this Murabaha finance structure can be used to finance the purchase of a home too, or home appliance, phone, laptop etc.

This is also used when customer place deposits with banks. However, given that there is no asset that needs financing, we have to change this structure a little bit.

We need to use a commodity Murabaha structure, which looks like this:
NOTE this is for a CM deposit

Try to understand why the bank MUST play the role of agent in transaction 1.

Even though this is a deposit, we see the customer giving the money to Trader 1, who then has to find a way to give it to the bank, which occurs, via Trader 2, but this is not shown, of course :)

Ok, now let us look at using a CM for a personal loan :

Ok this is presented as two “separate and stand-alone Sale contracts”.

This is a lie.

But let’s not dwell on that.

There is another way to present these flows which I prefer:

OK, so the customer actually receives his loan from the commodity buyer, and then the customer repays the bank at maturity of the loan.

Now, lets focus on the transaction where the customer sells the commodity to the commodity buyer –

do you know any retail bank customers who know where to sell commodity, and how?

Nor do I, so the bank kindly offers to play the role of agent here.

Again, if you understand WHY the bank MUST play the role of agent, then you begin to understand more about this structure.

Now, this structure is exactly the same as used for CM financing for loans in the 100x millions and also billions.

I have personally executed a transaction for over $2bn using this structure.

This is organised Tawarruq. It is called organised because every single transaction shown MUST occur for the whole thing to make sense, otherwise it fails.

Thus all the transactions are organised and agreed BEFORE the first transaction is executed.

For it to be Shariah compliant, all these transactions must occur independently and not be agreed in advance.

I find this claim really funny : ))

What have scholars said about this?

Well the Islamic Fiqh Academy have denounced this as deceptive, and said it is impermissible.

Islamic banks do this every single day, on the false claim that this is genuine Tawarruq.

This is a plain lie.

Now let us focus on once aspect where, once again, Islamic banks break AAOIFI rules here.
In Shariah Standard 30 on Tawarruq, it states:

Of course, in every single instance the commodity returns to the party that originally injected it into the structure, which is normally the commodity supplier.

Also:

Of course, it always happens that the client, the customer, always MUST appoint the bank as agent to sell the commodity that the customer has just purchased from the bank.

Again, if you understand WHY the bank MUST ensure the customer sells the commodity to the party chosen

by the bank, then you are on the way to proper understanding.

These are a few rules that are broken by the market practice of Commodity Murabaha.
Now, some people say “This is why banks are moving away from CM”.
My response is this – they are hardly moving away from it at all,

, they use it daily and in huge volumes. Reports estimate that up to 70% of ALL transaction by Islamic banks operate in this method.

I think it is probably higher.

Also a popular defence “Islamic banks have left CM behind, where they can and use Wakala or Mudarabah sometimes.”

My response is, yes this is true. However 3 key points to note
1)They retain ALL the questionable elements of CM, whatever contracts they choose to replace them with
2)They ONLY do this if the transaction is between two Islamic banks –

they NEVER use this new structure when they give loans to customers (try to understand why?)

3)In every case, the economic outcome of these new contracts is the same as that of CM ie they are lending at interest

Also they STILL end up breaking Shariah rules in this application of Mudarabah and Wakala!!

Where else is CM used?
As well as bank lending, it is used in
-Money markets
-Large corporate loans
-Savings, and deposits

-FX derivatives
-Profit rate swaps
-Capital protected investments
-Sukuk (in Malaysia)
-Home purchase, car purchase, asset financing
It is USED a lot - the whole Islamic banking industry is DOMINATED by CM.

SUMMARY

1)CM dominates Islamic banking
2)It is simply replicating a loan at interest
3)It breaks multiple AAOIFI Shariah standards
4)It is AWLAYS organised, rather than genuine Tawarruq
5)This has been labelled deceptive and impermissible by the Islamic Fiqh Academy

6) There is NO sign of change at all

Understand the CM model very well, and you WILL understand the whole essence of modern Islamic banking.

I pray and hope for change, and yes, I DO have a solution for everything that I criticise.

Thank you for reading

Hmm, I wonder if an interest rate has any connection with LIBOR, or a time factor.

What do you think?

OK, this Murabaha finance structure can be used to finance the purchase of a home too, or home appliance, phone, laptop etc.

This is also used when customer place deposits with banks. However, given that there is no asset that needs financing, we have to change this structure a little bit.

We need to use a commodity Murabaha structure, which looks like this:
NOTE this is for a CM deposit

Try to understand why the bank MUST play the role of agent in transaction 1.

Even though this is a deposit, we see the customer giving the money to Trader 1, who then has to find a way to give it to the bank, which occurs, via Trader 2.

This is not shown, of course - why not?

Ok, now let us look at using a CM for a personal loan :

Ok this is presented as two “separate and stand-alone Sale contracts”.

This is a lie.

But let’s not dwell on that.

There is another way to present these flows which I prefer:

OK, so the customer actually receives his loan from the commodity buyer, and then the customer repays the bank at maturity of the loan.

Now, lets focus on the transaction where the customer sells the commodity to the commodity buyer – do you know any retail bank customers who know where to sell commodity, and how?

Nor do I, so the bank kindly offers to play the role of agent here.

Again, if you understand WHY the bank MUST play the role of agent, then you begin to understand more about this structure.
Now, this structure is exactly the same as used for CM financing for loans in the 100x millions and also billions. I have personally executed a transaction

transaction for over $2bn using this structure.
This is organised Tawarruq. It is called organised because every single transaction shown MUST occur for the whole thing to make sense, otherwise it fails. Thus all the transactions are organised and agreed BEFORE the first

first transaction is executed

For it to be Shariah compliant, all these transactions must occur independently and not be agreed in advance.

I find this claim really funny : ))

There is another way to present these flows which I prefer:
OK, so the customer actually receives his loan from the commodity buyer, and then the customer repays the bank at maturity of the loan.

Now, lets focus on the transaction where the customer sells the commodity to the commodity buyer – do you know any retail bank customers who know where to sell commodity, and how?

Nor do I.

so the bank kindly offers to play the role of agent here. Again, if you understand WHY the bank MUST play the role of agent, then you begin to understand more about this structure.

Now, this structure is exactly the same as used for CM financing for loans in the 100x millions and also billions. I have personally executed a transaction for over $2bn using this structure.

This is organised Tawarruq. It is called organised because every single transaction shown MUST occur for the whole thing to make sense, otherwise it fails. Thus all the transactions are organised and agreed BEFORE the first transaction is executed.

For it to be Shariah compliant, all these transactions must occur independently and not be agreed in advance.

I find this claim really funny : ))

What have scholars said about this? Well the Islamic Fiqh Academy have denounced this as deceptive, and said it is impermissible.

Islamic banks do this every single day, on the false claim that this is genuine Tawarruq.
This is a plain lie.

Now let us focus on once aspect where, once again, Islamic banks break AAOIFI rules here.

In Shariah Standard 30 on Tawarruq, it states:

Of course, in every single instance the commodity returns to the party that originally injected it into the structure, which is normally the commodity supplier.

Also:

Of course, it always happens that the client, the customer, always MUST appoint the bank as agent to sell the commodity that the customer has just purchased from the bank. Again, if you understand WHY the bank MUST ensure the customer sells the commodity to the party chosen by

by the bank, then you are on the way to proper understanding.

These are a few rules that are broken by the market practice of Commodity Murabaha.

Now, some people say “This is why banks are moving away from CM”.

My response is this – they are hardly moving away from it at all, they use it daily and in huge volumes. Reports estimate that up to 70% of ALL transaction by Islamic banks operate in this method.

I think it is probably higher.

Also a popular defence “Islamic banks have left CM behind, where they can and use Wakala or Mudarabah sometimes.”

My response is, yes this is true. However 3 key points to note

1)They retain ALL the questionable elements of CM, whatever contracts they choose to replace them with

2)They ONLY do this if the transaction is between two Islamic banks – they NEVER use this new structure when they give loans to customers (try to understand why?)

3)In every case, the economic outcome of these new contracts is the same as that of CM ie they are lending at interest

Also they STILL end up breaking Shariah rules in this application of Mudarabah and Wakala!!

Where else is CM used?
As well as bank lending, it is used in
-Money markets
-Large corporate loans
-Savings, and deposits
-FX derivatives

-Profit rate swaps
-Capital protected investments
-Sukuk (in Malaysia)
-Home purchase, car purchase, asset financing
It is USED a lot - the whole Islamic banking industry is DOMINATED by CM.

SUMMARY

As I said at the start, understand the CM model very well, and you will understand the whole essence of modern Islamic banking.

I pray and hope for change, and yes, I DO have a solution for everything that I criticise.

Thank you for reading.

/THREAD