A Comment on Islamic Banking: Mark-up on Mark-up
Regarding the mark up on mark up issue in Murabaha deals, I would like to mention that the mark up on the goods is different in its nature than the mark up on money. Compound interest (mark-ups for delayed payments on the rates) has exponential growth which will naturally exceed any normal income opportunity over time. Simple mark up limits the debt to its ground, to the initial benefit estimated by the buyer. It allows mostly to cover the debts in lifetime which is empirically seen very difficult against compound interest.
I am not questioning the fact that mark-up in the existing form of Murabahah is more humane than an arrangement wherein mark-up on mark-up would have been demanded. For instance, there is no doubt that if a bank charges simple interest but doesn’t charge further interest if the borrower continues to default, it would be more humane compared to the way it is being done by the conventional system. However, riba, it would still remain.
If you charge 10% interest on an amount borrowed for one year it is labelled as riba, while if you sell a commodity of the same value from a customer asking him to pay after one year the price of the product plus 10% in addition, it is not riba! When you ask for the reason why one is correct while the other is not, the answer given is verse 2:275, which I emphasize is not saying that.
The reason why asking additional 10% from a borrower of cash is morally reprehensible is that he may or may not be in a position to do so, given that cash he borrowed must have already been used up. The same problem is associated with a real commodity like cotton, bicycle, or anything sold on Murabahah. What if the commodity is lost, or has been destroyed during the period of one year? It would create the same problem for the buyer
(borrower) as in the case of a borrowed loan. When I ask the defenders of contemporary Murabahah this question, they say, “That’s business”. Why is then not the same response acceptable in case of interest? The answer given is that that’s what the Shari’ah says. My question is where has the Shari’ah said that? The Shari’ah speaks clearly and loudly in the Quran and gets clarified in the hadith. Where has it been said in these two
sources? Verse, 2:275 is not saying that.
Just a clarification: In case of rent the problem mentioned above doesn’t arise. If you take an apartment on rent, and you decide after a while that you can’t afford it any more, you can duly hand it back to the owner, because the apartment is still intact. If, God forbid, it gets destroyed, you, as a tenant, are not responsible (whereas in case of interest and Murabahah/Bai Mu’ajjal, you are), because it wasn’t yours. The owner can’t
demand it from you. That kind of logic is unfortunately not there in the case of the Murabahah/Bai Mu’ajjal hybrid.