Murabaha as an Islamic mode of financing

2. Murabaha: The Perspective of
Islamic Bankers
By Muhammad Aqib Ali
Country Head & Director, International Islamic
Finance & Insurance Institute (IIFII)
&
Dr. Talat Hussain
Assistant Professor, University of Management &
Technology (UMT)

3. Background of the Study
The use of Murabaha as an Islamic finance mode is
prevalent in Pakistan and other Islamic banking
industries around the world.
The utilization of murabaha finance is not
questionable but it is actually the over utilization of
this financing method that arises reservations.
By evaluating the perceptions of Islamic bankers and
assessing their opinions regarding murabaha, the
negative viewpoints can be obliterated to promote
better understanding of the concept and to enhance
applicability of this vital Islamic financing mechanism.

4. Introduction
Islamic economic & financial paradigm is founded on the
principle of collective welfare as opposed to interest-
based conventional economic setup which entails
individual welfare and ignores cooperative welfare.
This is amazingly a fact that Islamic sacred texts offered
guidance on complex economic/financial matters
from the times when paper money did not even exist.
Islamic principles also provide guidance on the
architecture of a system that is economically just & fair
and is based on the schema of socio-economic welfare.

5. Islamic Finance Modes
The Islamic modes of finance are broadly grouped
into two main classes.
In First class are the equity or participatory based
modes like mudaraba, musharakah.
The second group includes trade based or sale based
mechanisms like salam, istisna and murabaha.
Although the trade-based modes like murabahah,
istasna and ijarah etc are not loans in real terms, yet
these create debts on the basis of deferred sales.

6. What is Murabaha?
Murabaha is a particular kind of sale in which the
seller discloses his cost to the buyer and adds a
certain profit to it to determine the selling price.
As an asset is being traded in this transaction,
hence Murabaha must at all times be considered
a trade transaction and not a loan.
An ordinary sale in Arabic is called Musawamah -
a bargaining exchange without disclosing or
referring to what the cost is.
On the other hand when the cost is known to the
client it is called Murabahah.

7. Significance of Murabaha
Murabaha – the most used Islamic financing tool by
the Islamic banks and financial institutes around the
word is a vital Islamic finance concept.
However, the over reliance on murabaha has created
doubts about the degree of Shariah compliance.
The study focuses on the views of Islamic bankers to
evaluate whether these doubts are well based or not
and what are the possible options which can be
considered in order to dispel these negative
opinions about Murabaha.

8. Review of Related Literature
 Murabahah actually is a special kind of sale in which cost and
profit, are expressly stated, it has nothing to do with financing in
its original sense. (Muhammad, Yusof & Hezlina 2011)
 Using Murabaha for financing, Islamic banks purchase certain
goods (required by clients) and sell at cost plus profit basis.
 Murabaha cost includes all expenses incurred in the acquisition
of goods such as invoice price, transportation, marine/in transit
insurance, sales tax and other Govt. levies etc.
 Payment of Murabaha price may at Spot; or in Installments; or
in lump sum (bullet) after a certain time period.

9. Review of Related Literature (Cont.)
Tarik (2004) mentioned in his work regarding murabaha
domination in Islamic finance and opined that “murabaha
syndrome” has affected Islamic banks’ product assortment.
 According to Ibrahim (2006), Shariah scholars approach must
be relatively accommodating and supple to deal with the
current economic and financial trends to ensure that neither
Shariah principles are compromised nor there is scarcity of
financial products/offerings based on contemporary demands.
Murabahah financing contains several risks to be countered by
Islamic banks, including – price risk, default risk, commodity risk
and market risk. (Iqbal and Mirakhor 2007)

10. Review of Related Literature (Cont.)
According to the Islamic Banking Bulletin of SBP
murabaha leads the financing share mix of
Islamic banks is 36%.
For instance, share of murabahah in financing
mix of IBIs/IFIs in Malaysia and Bahrain is more
than 54% (Abdus Samad, Norman, Gardner and
Cook 2005), and in Sudan it is over 43%.
Alsayyed (2010) noted that negative murabaha
perceptions are based not on the Islamic mode
itself but rather on its over – utilization by
Islamic banks globally.

11. Research Methodology
Research Questions
Research Design
The Sample

12. Research Questions
 Research Question No.1: Whether the generally held
views and opinions of Islamic bankers regarding murabaha
financing are adverse or favorable.
 Research Question No.2: To identify the important
factors that contribute to the favorable opinion of
murabaha by looking at the perceived variables like
murabaha Shariah compliance, murabaha operations
transparency, murabaha business support value,
knowledge and awareness of murabaha.
 Research Question No.3: In order to expunge the negative
perceptions about murabaha, what measures should be
taken keeping in view, the crucial role murabaha financing
plays in global Islamic banking industry.

13. Research Design
The study is designed in such a way to effectively
evaluate perceptions towards Murabaha to
assess the perspectives of Islamic bankers.
The research design comprises a structured
questionnaire mostly administered personally
and at few instances through mail.
Apart from getting the questionnaires filled
directly by the target audience i.e. the Islamic
bankers, several informal and casual interview
sessions also took place.

14. Sample of Study
The survey encompasses all the full-fledged
Islamic banks that include Meezan Bank, Dubai
Islamic Bank, Al-Barakah Bank, Bank Islami
Pakistan and Burj Bank in the order of maximum
branches in the country.
The sample size comprises 100 Islamic bankers
belonging to these five full-fledged Islamic banks.
This was ensured that all questionnaires are
complete, valid and suitable to be considered for
their inclusion in the data collection process in
the course of the research study.

15. Analysis & Results
In the initial part of analysis, the demographic
information of the respondents is discussed.
In the later part, the second section of
questionnaire is analyzed which relates to
Murabaha perspective of Islamic bankers,
through various statistical measures including
the measures of variation and inferential
statistics like regression analysis.

16. Demographic Analysis
 Includes personal attributes like their age, gender and religion.
 82% of respondents were male, 18% of them were female.
 61% of the respondents have age less than 36 years which
shows respondents are in mid or start of their careers, fact is
also verified when we analyze rank of bankers in the study.
 The analysis shows that 60% of the respondents were middle
level employees while 25% of the respondents were having
rank of managerial or upper level and the rest were junior
level Islamic bankers.
 With respect to educational profile, 22% have professional
qualification while only a small percentage of 2% of
participants hold a PhD degree, 42% hold Bachelors degree.

17. Regression Analysis
In order to assess the perception of Murabaha
based products and services, from the viewpoint
of Islamic banks’ employees; the second section
of the questionnaire was developed.
There were 14 items in the second section of the
questionnaire to fetch data about the Murabaha
financing mode. The distribution of these 14
items and their respective variables is given in
following table 1.1.

18. The Variables

19. Descriptive Statistics for Variables

20. The Model
 In order to generalize the above results of descriptive
statistics multiple ordinary least square regression is
performed by taking one dependent variable and four
independent variables.
 The general model of regression analysis is as follows:
PMi = b0 + b1SCi + b2OTi + b3BSi+ b4KAi+ ui
 Where
 PM = Perception about Murabaha
 SC = Shariah compliance
 OT = Operations and transparency
 BS = Business Support & Value
 KA = Knowledge and Awareness

21. ANOVA
 In order to proceed to the regression estimates first we
have to check whether going through the process of
estimation is worthwhile as compared to checking
means only or not? From table 1.3, it can be evidenced
that at 5% level of significance, model is highly significant
so model estimation is more appropriate than mean.

22. Model Summary
 As far as explanatory power of models is concerned, R square is
increased as compared to initial regression with problems of
multicollinearity. But after removal of multicollinearity problem
in table 1.8, model 3 has more explanatory power as compared
to model 1 and Model 2. It means model 3 has good fit.

23. Final Model Variables

24. Concluding Results
 So on the basis of table 1.9, our final regression model with
three independent variables is as follows:
PMi = b0 + b1SCi + b2OTi + b3KAi
PM = -1.62 + 0.53SCi+0.49OTi+ 0.56KAi
 From the above regression equation, we can interpret that
Shariah compliance has positive impact on the perception of
bank employees. It means if extent of Shariah compliance
will increase then perceptions about Murabaha will improve.
 Similarly if transparency in operations of Islamic banks and
knowledge levels about Murabaha improve, this will also
improve the impression of Murabaha perceptions.

25. Conclusion
 From the analysis results, this can be concluded that Murabaha
opinions and viewpoints of Islamic bankers are generally very
favorable, this is answer of our first Research Question.
 The answer to research question two is found through the
inferential statistical, in which three key variables emerged with
their positive impact on Murabaha, the Murabaha Shariah
compliance, transparency & operations, and knowledge &
awareness level regarding Murabaha.
 The answer to last research question on how to dispel negative
views regarding murabaha financing is by improving and
modifying the operations in Murabaha and enhancing the
knowledge & awareness levels of stakeholders to have a positive
bearing on the views and perceptions regarding Murabaha.

26. Thanks for Listening