Is the setting of prices different to the market price (incl. murabahah) halaal? The ‘murabahah’ method of financing done by modern ‘Islamic’ banks is a branch of riba

1. Please find below a similar question we had received, and our reply. %0D%0A%0D%0A2. Could you provide us with a reference for the incident of Hadhrat Umar R.A., so that we may follow it up.%0D%0A%0D%0A3. The Hadith you mentioned teaches us that there should be no intervention, and that the price must be determined by mutual consultation. The price should determined by the buyer and seller. There is no indication whatsoever to support the wrong notion that an item has to be sold at market value. It may be sold above or below market, as long as there is mutual agreement between the parties. The Hadith deals with price fixing from the side of the state. Under normal conditions, it is not permissible for the state to fix a price. Under exceptional circumstances, the Fuqahaa have allowed it. %0D%0A%0D%0Aand Allah Ta'ala Knows Best%0D%0A%0D%0Afor: Mufti Ebrahim Desai%0D%0AFATWA DEPT.%0D%0A%0D%0ACHECKED AND APPROVED: Moulana Imraan Vawda%0D%0A%0D%0AA: There is a famous adage in Arabic, "Li kulli fannin rijaal" (Every field has its men or experts)%0D%0A%0D%0AThis is an accepted axiom of life. As far as worldly matters are concerned, every sane person accepts and practices on this axiom. No intelligent person with a life threatening condition will rely on reading a few books on medicine, and thereafter be contented with self-diagnoses. Nobody of sound mind would embark on building a bridge relying solely on a few books on engineering he is able to get his hand on. %0D%0A%0D%0AUnfortunately, as far as Deen is concerned, some people seem to forget this indispensable maxim. The knowledge of Deen is taken to be a toy, where every ignoramus has free play to pass his personal opinion as ?research?. Anyone having read a book or two considers himself to be an expert and passes judgement on Shariah matters. In the words of the Holy Qur?aan they are ?astray and lead others astray?. An example of such deviation is the article attached below. %0D%0A%0D%0AThe writer very deceptively portrays himself to be an authority in Shariah matters, hence his forceful and confident rulings on matters regarding which he is obviously unschooled. Since the general Muslim public are unacquainted with the intricacies of the issues at hand, be had hoped that they may buy into his erroneous opinions. %0D%0A%0D%0AThe writer has obviously not understood fiqh (Islamic jurisprudence), therefore his glaring misunderstanding of the issue of market price. From reading the article it becomes clear that he is of the opinion that an item may only be sold at its market value. This is certainly not the position as far as the Shariah is concerned. An item may be sold above or below the market value, provided that there is mutual consent of the buyer and seller. There is no demand from the Shariah that an item has to be sold at its market value. When the market value has no bearing on the validity of the sale, it follows that ignorance of the market value too does not effect the validity of the sale. Hence the entire issue of the buyer?s ignorance is based on the false assumption and premise that the market value has relevance on the validity of the transaction. %0D%0A%0D%0AAssuming for one moment that the validity of the sale was linked to the market value, then too his argument falls short. Using the example given in the article, the $25 000 is in fact the market value for the car if sold on credit. It is not against Shariah to have one price for credit, and another for cash. Hence the car that is sold for $25 000 on credit is being sold for its marker value, for that is the normal price one would end up paying if one had to purchase this car on credit via some other means. Therefore the market value is not being violated.%0D%0A%0D%0AThe Hadith quoted by the writer further demonstrates his ignorance, and the need for him to leave Shar?ee matters in the hands of the experts of the Shariah, i.e. the Ulama. The Hadith has no relationship with the issue at hand. %0D%0A%0D%0AThe first point to understand is the scenario being discussed in the Hadith. Let us illustrate with an example. Zaid wishes to purchase a car from Amr, the market value being $15 000. Zaid is unaware of the market value. Amr deceives him and says that the marker value is $25 000. If the sale is concluded, then such a sale will be valid by virtue of their being mutual consent. However, since Zaid was deceived, he has the legal right to have the sale annulled. On the other hand it is Haraam for Amr to use the surplus amount that he had earned by means of deception. %0D%0A%0D%0AThe second important point regarding this Hadith is that here the word Riba is used in the figurative sense, and not literally. Deceiving a mustarsal is Haraam, and the income earned thereby is Haraam. It is Haraam in a similar manner that Riba is Haraam. The word Riba is used as a form of comparison. The money earned from this deceptive transaction is Haraam in a similar manner as Riba is Haraam. It will however not fall under the technical definition of Riba. %0D%0A%0D%0ATherefore according to another narration of the same Hadith, the words used are: ?Deceiving a mustarsal is Haraam.? Here the word Haraam is used instead of the word Riba. (for details see Ittihaafus saadaatil mutquneen bi sharhil ihyaa-e uloomid deen vol. 6 pg. 397).%0D%0A%0D%0AThe Hadith has no correlation with the Murabaha transaction which Islamic banks are undertaking. The banks do not deceive their clients by claiming that the market value is so and so. All they present is an offer to sell at a certain price. The purchaser has the option to accept or reject. He is not being deceived in anyway. Hence the Hadith does not apply to such a transaction.%0D%0A%0D%0AThe writer further displays his ignorance by suggesting that the elimination of risk constitutes Riba. Risk has no role to play in the Shar?ee definition o Riba. Even if all risk is remove from a transaction, by means of a mortgage (Rahn) or otherwise, it does not necessarily constitute Riba. %0D%0A%0D%0AIn brief, each person should be contended with his%2Fher field of expertise, and should leave issues of the Shariah to the Ulama. Should they wish to delve into matters of Deen, they should study under reliable Ulama. The blatant errors found in the said article should serve to emphasis this point%2F%0D%0A%0D%0AQ: I need your comments on the following article by Imran Hosein%0D%0A%0D%0AMURABAHA (TO SELL AT A PROFIT)%0D%0A%0D%0AIslamic Banks around the world are attempting to by-pass riba through a process of devilish financial engineering. Most of the alternatives to riba which they offer the gullible Muslim publc are nothing more than scarcely disguised forms of riba. For example, they utilize a financial mechanism which they erroneously define as murabaha. The bank would purchase an article for cash and then sell it for credit at a higher price than that for which it was bought. The bank argues that since there is agreement on the new price between buyer and seller the transaction is halal.%0D%0A%0D%0AIf the bank were to purchase a car for $15,000 cash, and then proceed to sell that very car for $25,000 cash in the same market in which it was purchased, the transaction would be of doubtful validity since the market price would be manifestly violated. Indeed, why would anyone pay $25,000 cash for a car when the market price is $15,000? If the buyer was unaware that the market price was $15,000, and the seller exploited the buyer's ignorance, the transaction would constitute riba since it would be a form of deception.%0D%0A%0D%0AAnas ibn Malik radialloanhu said the Messenger sallalahualaiwasallam said: Deceiving a mustarsal (someone who is unaware of market prices) is riba. (Bayhaqi)%0D%0A%0D%0AIf the buyer purchasedthe car for $25,000 despite the fact that he was aware of the market price, it would indicate the presence of some improper hidden element to the transaction. He could, for example, be mentally unbalanced. That would invalidate the transaction.%0D%0A%0D%0AIf, on the other hand, the bank were to buy the car for $15,000 cash in one market, and then proceed to sell it, in the same market, for $25,000 on credit, there would be no other justification for the increase in price other than the factor of time 9i.e. credit).%0D%0A%0D%0ASuch a transaction would be one in which money would increase in consideration of time, - or money breeds money over time! It would be no different from riba al-nasi'ah in the time of the Prophet sallalahualaiwasallam . In fact, it would be pure riba!%0D%0A%0D%0AThose misguided Muslims who obstinately cling to this false murabaha should fear Allah, the Most High, and stop misguiding Muslims. They should fear the double punishment which awaits those who misguide others: These, Lord, are the men who led us astray. Let their punishment be doubled in the Fire. (Quran: - 7:38)%0D%0A%0D%0AThe argument that such a transaction does not constitute riba because there is an element of risk in it is entirely spurious and without any substance whatsoever. The party which is selling on the basis of credit usually endeavours to eliminate risk as much as is possible. And so such a transaction usually requires a mortgage through which the seller would recover the money owed to him in the event that the buyer defaults in fulfilling his obligations under the credit contract.