Murābaḥah financing revisited: The contemporary debate on its use in Islamic banks

Abstract

The murābaḥah contract, an ordinary contract in classical Islamic law, has played a significant role in the emergence and development of modern Islamic Banking and Finance. This contract which is basically a “resale with a stated profit” contract was introduced into the modern literature in the late 70’s in a totally redesigned form as an alternative to the conventional modes of credit. This modern financing tool has become the subject of intense debates since then and has been subject to criticism by some scholars. This paper aims at portraying the juristic discussion and debate on this modern contract and its application by Islamic banks. The first part of the paper introduces the subject and gives a summary of the Islamic injunctions on the murābaḥah contract in its original form based on the primary sources of Islamic law. The second part, which is the substantial part of the paper, portrays the profound transformation that the murābaḥah contract has undergone to make mark-up financing possible and summarizes the discussions related to the modern use of murābaḥah by Islamic banks.