CIFE Murabaha & Ijara 1 — Questions and Answers
Question 1: What is the definition of 'Murabaha' in Islamic finance?
- A cost-plus-profit sale where the seller discloses the original cost and adds an agreed profit margin, with payment typically deferred (Correct answer)
- A leasing contract for physical assets
- A profit-sharing joint venture
- An interest-free loan for home purchase
Correct answer: A cost-plus-profit sale where the seller discloses the original cost and adds an agreed profit margin, with payment typically deferred
Murabaha is a Shariah-compliant sale where the seller buys an asset, discloses its cost to the buyer, and adds a mutually agreed profit margin; the buyer pays the total price, often in instalments.
Question 2: In a Murabaha home finance transaction, who must own the property before selling it to the client?
- The Islamic bank must first purchase the property and take legal ownership before selling it to the client (Correct answer)
- The client purchases the property directly from the developer
- A third-party guarantor holds the title
- The government holds the deed until full payment
Correct answer: The Islamic bank must first purchase the property and take legal ownership before selling it to the client
For a valid Murabaha, the bank must genuinely purchase and own the asset before on-selling it to the client; this establishes the bank's risk and ownership, justifying its profit margin.
Question 3: What is 'Tawarruq' (Commodity Murabaha) and how is it used in Islamic banking?
- A monetisation technique where a client buys a commodity on credit from the bank and sells it in the spot market for cash to obtain liquidity (Correct answer)
- A direct property purchase arrangement
- A method of profit-sharing in agriculture
- A type of Islamic pension product
Correct answer: A monetisation technique where a client buys a commodity on credit from the bank and sells it in the spot market for cash to obtain liquidity
Tawarruq involves a client buying a commodity (e.g., metals) on deferred payment from an Islamic bank and immediately selling it to a third party for spot cash, effectively generating liquidity while maintaining Shariah form.
Question 4: What distinguishes 'Murabaha' from a conventional loan in terms of Shariah compliance?
- Murabaha involves a real asset purchase and sale with a disclosed profit margin, whereas a conventional loan charges interest on money lent (Correct answer)
- Murabaha charges a higher rate than conventional loans
- Murabaha is essentially identical to a conventional loan in legal structure
- Murabaha does not require any documentation
Correct answer: Murabaha involves a real asset purchase and sale with a disclosed profit margin, whereas a conventional loan charges interest on money lent
Murabaha's compliance rests on the real asset transaction and the bank's genuine ownership and risk exposure; a conventional loan is simply money lent for interest, lacking the required underlying asset.
Question 5: In a Murabaha contract, what happens if the client defaults on deferred instalments?
- The bank may impose penalties only if they are donated to charity (not retained as income), and may restructure but cannot charge compound interest (Correct answer)
- The bank charges compound interest on overdue amounts
- The bank immediately seizes all assets of the client
- No penalty is permissible under any circumstance
Correct answer: The bank may impose penalties only if they are donated to charity (not retained as income), and may restructure but cannot charge compound interest
Shariah prohibits charging additional interest on late payments; penalties may be set to deter default but must be directed to charity rather than retained as bank income to avoid Riba.
Question 6: What is 'Murabaha to the Purchase Orderer' (MPO) structure?
- A client requests the bank to purchase a specific asset; the bank buys it, then sells it to the client on a cost-plus-profit deferred payment basis (Correct answer)
- The bank purchases assets speculatively without client instruction
- The client buys the asset and then sells it back to the bank
- A partnership where both parties choose the asset together
Correct answer: A client requests the bank to purchase a specific asset; the bank buys it, then sells it to the client on a cost-plus-profit deferred payment basis
In MPO, the client identifies and requests a specific asset; the bank procures it (taking ownership and risk), then sells it to the client at a disclosed marked-up price with deferred payment terms.
CIFE Murabaha & Ijara 1
What is the definition of 'Murabaha' in Islamic finance?