Buyer protections in murabaha

Everyday Islamic Finance Business and Career Questions
#1

Assalamu Alaikum,

I have a couple of clarifications I am seeking on murabaha transactions.

  1. In murabaha, I feel there is a potential for severe harm to the buyer. I will illustrate this with an example. Let’s say a house is being sold for $500,000. However, the financier offers it to the buyer for $700,000 over 20 years in a murabaha contract. Now, the buyer has to pay $700,000 over 20 years - usually this value is comparable to what the buyer would have had to pay to a bank in an interest-based mortgage. However, let’s say the buyer now lost his job and he has to relocate to another city or he has to sell his house for some other reason after 2 years. In this scenario, after 2 years the buyer will sell his house at some price ($500,000 + 2 years appreciation ~ $550,000) which will be far less than what he owes the financier. The buyer could lose all his capital gain and still end up with hundreds of thousands of dollars in debt. How can this situation be mitigated? Is it permissible to have some kind of “early sell” clause in the murabaha contract - i.e. if the house is sold early in x years, then only y amount will be due? This scenario does not arise in a conventional mortgage where you would not end up paying 20 years of interest to the bank if you sell the house early.

  2. In a murabaha contract, the financier will purchase the property first. Is it allowed for the financier to require the buyer to put forth both the deposit and downpayment for the initial purchase?

JazakAllah khair

#2

Wa alaykum salaam,

  1. In reality, that risk is present in all financing products, not just Murabahah. Banks will have their credit checks and tests to capture the risk and minimise the chance of default and foreclosures. But its a reality which people must be aware of.

That is why, the diminishing Musharakah structure at times works better in such scenarios.

  1. In Murabahah contracts, financiers usually ask for Hamish Jiddiyyah and Arbun.
#3

Assalamu Alaikum,

I’m not sure how it is in every country, but the risk I described above is quite severe and could cause extreme hardship here which would not be present if the same scenario occurred via a bank purchase - people are selling houses early all the time here when dealing banks for reasons such as investments, upgrades or to move to another city, but the same scenario via the murabaha route could eliminate one’s life savings and put one years in debt. So going back to my earlier question - is it permissible to have some kind of protection for the buyer like an “early sell” clause in the murabaha contract - i.e. if the house is sold early in x years, then only y amount will be due?

JazakAllah khair

#4

Wa alaykum salaam,

There is potential to structure most of such types of protections, but this is something for the institution and the Shariah board to make an assessment of and see whether it is needed.

It is best for the institution offering this to assess this from their risk management process and Shariah advice from their Shariah board.