Murabaha Commodity, What is it for?

Since 2004 there has been a big issue in Indonesian Islamic banking and finance community with little attention given by the industry. The issue become big not because there is no answer to the problem raised, but because the issue is forwarded by a big-foreign bank which run Islamic window. The bank insists that since the issue is settled by Sharia Board of the bank in their headquarters, then the country in which the bank operate Islamic window also should allow the product to be launched and utilized by the community.

What is Murabaha Commodity ?

Commodity Murabaha is a product offered by banks, originally in middle east, as a response to high excess liquidity in Islamic bank by the way of helping them to buy a commodity (metal) from a bourse. When it is already bought, then Islamic bank sell them to the bank

Function of Murabahah Commodity

Islamic bank trying to manage their cost for two reasons; First to fulfil the need of their customers for fixed return so that they might compete with conventional banks.Second is to put a cost base for financing return. For this reason no argumen is valid for profit sharing financing like Mudaraba or Musharaka.

Questions about Murabahah Commodity 

The question is why should Murabaha (not Mudaraba or Musharaka) used in this kind of easy but controversial product? The answer is simple. It is because Murabaha provides a fixed return. In Mudaraba or Musharaka the party involved in the transaction should bear loss if there is a loss.

Next question is why should commodity used int the product (not foreign exchange)? The answer is not difficult either. Because it is real goods, and it is simpler compared to foreign exchange which will be difficult to manipulate since it involve "sarf".

Then, the relevant  question is, it is real murabaha? Is it real goods sold in this product? If it is not, then why it pass sharia screening by our respected sharia board?

It does not require expertise to know that Islamic bank tried hard to have fixed cost so that they can manage their return in more convenient ways. If it is so, then why should we need  a practice called Profit Equalization Reserve? Profit Equalization Reserve is practice by Islamic bank to keep profit paid to (Mudaraba deposit-based) customers competitive to the market, by allocating part of the profit generated in the bank account.

History of Commodity Murabaha

Islamic banking, especially in Middle East has been flooded with fund so that they have to manage it properly to generate income that is relatively competitive to conventional banks. The fund owner are quite sensitive to any fluctuation in the market so that they require bank to have it fixed for certain time. What to do?

They find it in Murabaha Commodity. Those customer are offered to buy commodity (mostly metal) from London Metal Exchange through the bank who act as agent. After the purchase is executed by cash then the bank will ask customer to sell it to the bank himself for a certain time, says 3 months, with price equal to the price in the original purchase, plus additional payable at due time.

Murabaha Commidity is an easy way to solve excess liquidity problem.

Issues in Commodity Murabaha

There are two issues in Murabaha Commodity. First it consist of Tawarruq and Tawarruq Munazam. Tawarruq is sale by first party a commodity (normally by deferred payment) to second party after which the second party sell it to the third party (usually by cash and with a lower price). In Tawarruq Munazzam all teh transaction is engeneered in such a way that the commdity will return to the the first party. This is a big sharia issue. It is an issue because they are many ulamas who considers Tawarruq is not allowed, as it is similar to 'Inah. The only difference lies on that it involves 3rd party.

Second it is derivative instrument. Many regulator try to avoid giving licence to islamic bank because it might be used by its conventional bank to escape from the same limitation in conventional regulations.

to be continued....