Choosing Between Murabaha, Ijarah and a Conventional Loan for RM 1.2 Million of Expansion

Option	Calculation	Total cost
A: Murabaha	1,200,000 + (1,200,000 x 7.9% x 3)	RM 1,484,400 (41,233 a month)
B: Ijarah	39,500 x 36 + 10,000 transfer	RM 1,432,000
C: Term loan	1,200,000 + (1,200,000 x 6.8% x 3)	RM 1,444,800

On the face of it, C is cheaper than A by RM 39,600 and more expensive than B by RM 12,800. But C is not comparable as presented. It requires the RM 400,000 fixed deposit to be pledged as security, so that liquidity is encumbered for three years, and it generates RM 400,000 x 3.1% x 3 = RM 37,200 of interest over the term. That interest is riba: it cannot be booked as income, cannot be used to reduce the financing cost, and must be purified to charity. Even if you netted RM 37,200 against the loan cost, which you should not, the company would be paying 6.8% to create a sum it must give away.

Recommend B, ijarah. It is the lowest total cash cost, the monthly RM 39,500 is fixed for the term giving the bakery a stable covenant, and the bank, not the bakery, bears ownership risk during the lease. The saving over A is RM 52,400 on the same underlying asset, which is the point that kills the assumption that the Islamic option is always the expensive one.

Cost is not the only test, and here it cuts both ways. A's late-payment charge is acceptable only because it goes to charity and not to the bank's income; a charge that enhanced the bank's profit would be riba and would make the facility non-compliant regardless of price. B's end-of-term transfer must be a separate sale or gift under a unilateral undertaking, not a condition embedded in the lease; if the transfer is a condition of the lease, the arrangement is a hire-purchase in substance and the lease becomes a financing contract with different risk allocation. And the company must close the conventional fixed deposit regardless of which option it takes.

Safeguards for the ijarah:

1. Ownership and risk. The bank must acquire and actually own the equipment during the term, with the registration or title evidence available. The bakery holds it as lessee, not as owner. If the bank never takes title and simply advances RM 1.2 million, the arrangement is a loan with a lease label.
2. Maintenance and insurance. Major structural maintenance, and takaful on the asset, sit with the lessor as owner; routine operating upkeep sits with the lessee. If the contract dumps takaful and ownership-level maintenance on the bakery while the bank retains title, the bank has shifted the ownership risk that gives the structure its validity, and the rentals begin to look like profit on a loan.
3. Rent must be definite and not a function of time value. Fixed rentals of RM 39,500 for the term, reviewed only at stated intervals if at all. Rent must never be computed as principal plus interest for the period elapsed.
4. Ending the lease. A unilateral undertaking (wa'd) by the lessor to sell the asset to the bakery for RM 10,000 at the end, exercisable at the bakery's option. The sale must be documented separately at that time, with an offer, acceptance and price.
5. Penalty. If a late charge is included, it must be a fixed amount or percentage donated to charity, not compounding, and not increasing the bank's income.

One feature that would invalidate it: making the transfer of ownership a condition of the ijarah contract itself, so that the lease cannot exist without the promise of sale. That converts the lease into a sale with deferred payment in substance, and the rentals paid along the way are then payments of price with a time element, reopening the riba analysis the structure was designed to avoid. Two contracts, two documents.

Zakatable current assets: cash RM 250,000 + receivables net of doubtful RM 140,000 + inventory at cost RM 310,000 = RM 700,000. Deduct payables of RM 120,000 = RM 580,000. Nisab, at RM 320 a gram for 85 grams, is RM 27,200, so the base is well above it and zakat at 2.5% is RM 14,500.

The judgement point is the financing instalments. If you deduct the full 12 months of the ijarah rentals (12 x 39,500 = RM 474,000), or the murabaha instalments under option A (RM 494,800), the base collapses to nil and the company pays nothing. That is aggressive. The more defensible approach deducts liabilities that are actually due and payable, and treats the future instalments of a term facility as an obligation maturing over time, not a present debt. Whichever basis is chosen must be disclosed and used every year, because switching bases year to year is what attracts scrutiny.

Non-Muslim shareholder: zakat is an obligation on the Muslim shareholders, not on the company as an entity. Two acceptable routes: the company computes zakat on 95% of the base and pays on the Muslims' behalf, treating the 5% as sadaqah if it pays on the full amount; or it computes nothing and the owner pays on his personal share. Do not let the company pay zakat on 100% and describe it as satisfying the non-Muslim investor's obligation, because he has none. The RM 14,500 above should therefore be trimmed to 95% = RM 13,775 if paid at company level on behalf of the Muslim shareholders.

Fixed deposit interest: RM 400,000 x 3.1% = RM 12,400 a year is riba. It must be identified, kept separate, and given to charity without expecting reward; it must not be counted in the zakat base as if it were clean wealth or used to pay the zakat itself. Record the purification separately from the RM 13,775.