Murabaha on a Falling Market
Sahara Islamic Bank finances a commodity murabaha for a trading company, Al-Rihla, to purchase copper. The structure: Sahara buys copper on the spot market for $2,000,000, sells it to Al-Rihla on deferred payment at $2,180,000 payable in 12 months (a markup of $180,000, disclosed as the profit). Al-Rihla pledges the copper as security. Six months later, copper prices fall 22%. Al-Rihla's business deteriorates and it asks Sahara to reduce the deferred price to $2,050,000, arguing that the market has moved and that a 'fair' bank would share the loss. Al-Rihla also asks to sell the copper back to Sahara at the current market price and settle the remainder later. Sahara's Shariah advisor is asked for an opinion. Separately, the bank's treasury wants to book the murabaha receivable into a securitization and sell it to a conventional fund at a discount to face value.
1. Assess Al-Rihla's two requests against murabaha principles.
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Request 1: reduce the deferred price. The murabaha price, once the contract is concluded, is fixed and binding. The markup was disclosed at inception and the sale was completed; a subsequent market movement does not reopen the price. Reducing it unilaterally would convert a fixed sale into something resembling an interest-bearing loan with variable terms, and would breach the principle that the seller bears no price risk after delivery.
However, there is a recognized permissive practice: the seller may voluntarily waive part of the profit (ibra') at maturity, without contractual obligation and without it being a condition of the contract. Key constraints:
- It must not be stipulated in the contract.
- It must not be tied to a formula that makes it effectively variable interest.
- It should be documented as a discretionary waiver, not a renegotiation.
So: Sahara may forgive part of the profit as a goodwill gesture, but cannot be obligated to, and Al-Rihla's 'fair bank would share the loss' argument has no contractual or Shariah basis.
Request 2: sell the copper back and settle later. This is more problematic. A buy-back at current market price combined with deferred settlement of the shortfall begins to resemble a new deferred-money-for-money arrangement. If structured as a genuine new sale at market price with immediate settlement, it is permissible. If Sahara buys back the copper and simply rolls the shortfall into a new deferred obligation, the structure risks tawarruq-like or bai' al-'inah characteristics depending on the school of jurisprudence and the local regulator's view. The Shariah advisor must review the actual documentation, not the description.
2. The treasury proposes selling the murabaha receivable to a conventional fund at a discount. Identify the Shariah issues and state whether the transaction can proceed as described.
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Core issue: sale of debt (bai' al-dayn). Classical jurisprudence restricts the sale of a monetary debt to a third party, and the majority position prohibits selling debt at a discount because the discount is economically indistinguishable from riba. Some schools and several modern regulatory frameworks permit sale of debt at face value; discount sales are far more contested.
Applied here. Selling a $2,180,000 receivable to a conventional fund for, say, $2,050,000 means Sahara receives less than face value in exchange for transferring the claim. That discount is the Shariah problem. Additionally, the buyer is a conventional fund, and the underlying receivable is a murabaha claim - a pure monetary obligation - not a tangible asset.
Can it proceed? Not as described. Options:
- Sale at face value to an Islamic bank or Islamic fund, if the governing framework permits bai' al-dayn at par.
- Securitization backed by tangible assets, where the underlying pool includes a sufficient proportion of real assets (e.g., the copper itself, ijara assets) rather than pure receivables.
- Refinancing/assignment structure reviewed by the Shariah board and local regulator.
Governance point. This is not a treasury decision. It requires a formal Shariah board ruling, documented, before any term sheet is signed. Treasury's framing ('it's just a receivable sale') is precisely the kind of recharacterization that Shariah review exists to catch.
3. Al-Rihla's pledge of the copper as security: what happens if Al-Rihla defaults and the copper is worth $1,560,000 against a $2,180,000 receivable?
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Enforcement mechanics. The copper is pledged as security (rahn). On default, Sahara may realize the collateral, but the proceeds must be applied to the debt, and any surplus returned to the pledgor. Any shortfall remains a claim against Al-Rihla - the bank may pursue it, but may not charge a penalty that functions as riba.
The numbers. Collateral value $1,560,000 against $2,180,000 receivable = shortfall of $620,000. Sahara realizes the copper, credits $1,560,000, and pursues Al-Rihla for $620,000 as an ordinary unsecured claim.
Shariah constraints on the shortfall.
- Sahara may not impose a late-payment penalty that accrues to its own income; any penalty must go to charity, and many boards require it to be a fixed amount, not a percentage that grows with time.
- Sahara may not restructure the shortfall into a new deferred amount with an added markup - that is a rescheduling of debt for a higher amount, which is riba.
- If Al-Rihla is genuinely insolvent, classical guidance is to grant respite or forgive; a bank may choose to do so as a discretionary act.
Practical recommendation. Realize the collateral promptly, document the shortfall, and pursue it as a receivable without markup. Consider a voluntary settlement at a discount to face value - permissible as a negotiated release, provided it is not pre-agreed in the contract.