of goods for the finance is essential.
Back in 1948, at the opening ceremony of the State
Bank of Pakistan, father of the Nation, Quaid-e-Azam Muhammad Ali
Jinnah has said "The adoption of Western economic theory and
practice will not help us in achieving our goal of creating happy and
contented people. We must work our destiny in our own way and present
to the world an economic system based on true Islamic concept of
equality of manhood and social justice. We will thereby be fulfilling
mission as Muslims and giving to humanity the message of peace which
alone can save it and secure the welfare, happiness and prosperity of
The structure of Islamic Banking and Financial
system revolves around prohibition of any predetermined return derived
on loan/debt (Riba) and legality of profit. Riba, commonly known as
interest, is a certain increase taken as premium from the debtor or
cost accrued, irrespective of the outcome of the business. It
represents the return on transactions involving exchange of money for
money, or the addition, on account of delay in payment, to the agreed
price on sale debts. All the three constitutions adopted so far in
Pakistan, all reports of the Council of Islamic Ideology and findings
of various commissions/committees constituted on the subject of
Islamisation of economy/financial system unanimously called for
elimination of Riba.
Towards the end of eliminating interest based
banking, the State Bank of Pakistan has issued various circulars. The
most important circular issued by way of standing instructions to
banks is the BCD circular No. 13 dated 20.6.1984, on elimination of 'Riba'
from the banking system.
The circular states that:
(i) As from
Ist of July 1984, all banking companies will be free to make finances
available in any of the modes of financing listed in annexure I.
(ii) As from
1st January 1985, all finances provided by a banking company to the
Federal Government, Provincial Governments, public sector corporations
and public or private joint stock companies shall be only in any one
of the modes indicated in annexure I (given below).
from 1st January 1985 all finances provided by a banking company to
all entities, including individuals, shall be on same basis as
mentioned in (ii) above.
(iv) As from
1st July 1985, no banking company shall accept any interest bearing
deposit. All deposits accepted shall be on the basis of participating
in profit & losses of the banking company.
It contains 12 possible modes of financing, divided
under three broad headings:
Trade related modes of financing.
Investment type modes of financing.
These all are obviously
non interest based (NIB) modes of financing.
Under the trade related modes of financing there
are given six modes, one of which is 'Morabaha Financing'.
It is purchase of goods by banks and subsequent
sale to clients at an appropriate mark-up in price, on deferred
payment basis. In case of default there can be no mark up on markup.
OPERATIONAL METODOLOGY OF MORABAHA.
Goods are purchased by the bank from a third party.
The bank first acquires these goods and then sells the same to the
client. For this purpose, the bank may appoint the client as its agent
for purchase of the required goods.
The client makes a purchase agreement with the seller of goods.
The client then informs the bank with a request to credit the purchase
price in his Morabaha account.
When the goods/documents of title are received by the client (banks
agent), he sends a letter to the bank confirming receipt,
simultaneously offering to purchase the same on markedup price.
The bank accepts the offer and sells the goods on marked up price to
be paid on a definite date in future. Both the marked up price and
date of payment are stated in the bank's letter given to the client.
Each time goods are purchased by the client from the seller on behalf
of the bank and then from the bank, the following letters/documents
are executed between the bank and the customers availing the Morabaha
Finance on the basis of
This agreement is the main
agreement for sale and purchase.
Local Purchase Order (LPO)
Without the above set of documents, no Morabaha
transaction will be valid.As described in step (vii)
of the operational methodology of a Morabaha transaction that the
marked up price is to be paid on a definite date, this means that the
particular agreement is for a fixed and definite period. No markup can
be charged beyond that period.
The Islamic Bankers under the title of Morabaha
Financing are treating this kind of finance as an ordinary interest
bearing loan. At the expiry of the fixed term e.g 180 days of the
transaction, they simply recover the markup (difference in sale and
purchase price) by debiting it to the current account of the client
and renew the transaction by preparing a new set of documents and
giving it a new reference number.
In their opinion old transaction has been finished
and a new transaction has taken place. It is pertinent to note here
1. No actual
purchase and sale has taken place.
2. Even the
client has not paid to the bank the actual purchase price (principal)
he has only been debited with the markup (difference between purchase
and sale price)
of Morabaha transaction is not permitted but the Islamic bankers are
doing so, not only once but again and again and again. In one
instance, e.g this process of renewal was carried on for six years,
until it was challenged in the court of law and decided against the
of Morabaha transactions is illegal, markup charged by the bank upon
renewal is illegal, mere debit and credit entries shown in the
Morabaha account statement are fictitions entries, with no actual cash
disbursements, with no actual sale and purchase of goods. These are
all sham transactions.
5. As every
transaction of Morabaha requires signed contracts, Morabaha allowed
without supporting contracts, Agency Agreements and LPOs, are without
legal support and unauthorised as such no mark up on such one sided.
Morabaha is legally justified and is contrary to the basis of Morabaha
Investment of Islamic Financing. The Islamic concept of trade and
business requires written agreements.