Introduction The literal meaning of usury or riba in Arabic language is to excess or increase.

The Quran explains riba as an unlawful and forced addition to the payback value of money or goods lent from one person to another. Riba falls under two main categories which are riba al nasi'ah which is riba on lent money and riba al fadl which is exchange of the same commodity but of unequal quality and quantity. Islam forbids riba in all its forms and considers it a forced addition to the value of money to be returned or goods lent from one person to another. In Surah Al-baqarah verse no.275, the Quran says: Those who devour usury will not stand except as stands one whom the Satan by his touch has driven to madness. That is because they say, "trade is like usury", but Allah has permitted trade and has forbidden usury The main concept behind this verse is that Islam recognizes trade and commerce that is, earning profit but has forbidden riba. Islam not only recognizes trade as a lawful profession but also encourages it within the parameters and rules laid down by Allah. These rules guide mankind to trade that is halal according to shari'ah. One of the rules in trade is that it has to be free from usury or riba. Allah has mentioned interest in the Quran in four main places which are as follows: Surah Al-Baqarah, verse 275, 276, 278 and 279. Surah Al Imran, verse 130 Surah Al Nisa, verse 161 Surah Al Room, verse 39 In surah Al Baqarah, verse 278 Allah says: Oh you who believe! Fear Allah and give up what remains of your demand for usury if you are indeed believers. Hazrat Ali radiyallahu anhu reported that he heard the Prophet Mohammad sallallahu alaihe wasallm cursing the devourer of usury, its giver, its scribe and one who refuses to give zakat and he used to forbid mourning. (Ibn Majah, Darimi) Usury is prominent in many conventional banking financial tools from simple loans to leasing and financing businesses. Islam offers alternatives to the conventional banking financial tools which have their own guidelines, principles, philosophies and conditions which allow them to be in accordance with the shari'ah. These tools are: Musharakah Mudarabah Murabahah Ijara Salam Istisna

One of the most important characteristics of Islamic financing is that it is an asset-backed financing. The conventional / capitalist concept of financing is that the banks and financial institutions deal in money and monetary papers only. That is why they are forbidden, in most countries, from trading in goods and making inventories. Islam, on the other hand, does not recognize money as a subject-matter of trade, except in some special cases. Money has no intrinsic utility; it is only a medium of exchange; Each unit of money is 100% equal to another unit of the same denomination, therefore, there is no room for making profit through the exchange of these units inter se. Profit is generated when something having intrinsic utility is sold for money or when different currencies are exchanged, one for another. The profit earned through dealing in money (of the same currency) or the papers representing them is interest, hence prohibited. Therefore, unlike conventional financial institutions, financing in Islam is always based on illiquid assets which creates real assets and inventories. The primary focus of our report will be on murabaha. Murabahah transaction has been permitted by Shariah scholars under some conditions that are to be fully observed. These conditions make Murabahah transaction different from the interest-bearing loan transaction. Murabaha Murabahah is mode of financing used by most of Islamic banks and institutions. In reality, it is a term of Islamic Fiqh and refers to a specific sale rather than financing in its original meaning. Murabahah is a sale i.e. "the exchange of a thing of value by another thing of value with mutual consent".(reference?) The distinguished feature of Murabahah is that the seller discloses the actual cost he incurs in acquiring the commodity and the profit he is charging as a lump sum amount or based on a certain percentage. It is basically a sales based on cost plus concept. It has the following characteristics The profit in Murabahah must be determined with the mutual consent of the buyer and seller. All expenses incurred in acquiring the commodity like fright, taxes can be added in the cost price and profit can be applied on aggregate cost. Most importantly, it is valid only where the exact cost of a commodity can be determined. Fixed payment of the commodity can be on spot or on a subsequent date agreed upon by both parties. Therefore Murabahah actually does not imply the concept of deferred payment. To incorporate the concept of deferred payment, Bai Mujjal is associated with Murabahah. Bai Mujjal is a sale where both the buyer and seller agree that the payment of the article of trade shall be deferred. Its transaction has following features: Bai mujjal is valid if due date of payment is certain and fixed in an unambiguous manner. Deferred price can be greater than the cash price but it is fixed at time of sale. Once the price is fixed it can neither be decreased in case of early payment nor can it be increased in case of default. To secure the payment, the seller may ask the buyer to furnish a security in the form of a mortgage or in form of a lien.

The buyer might have to sign the promissory note or bill of exchange, but this note or bill can not be traded that seller can not sell to third party. Murabaha as a mode of financing The basic features for Murabahah that need to be followed in order for murabaha to be a shari'ah compliant mode of financing are as follows: Murabahah is not a loan provided on interest. It is the sale of the commodity on the deferred price which includes an agreed profit, added to the cost of the commodity. It cannot be used as a mode of financing except where the client needs to purchase a tangible commodity. Murabahah should fulfill all the conditions compulsory for the sale, since it is a sale and not a loan. The financier should have the ownership of the commodity before he sells it to the client since it is a sale transaction. The risk during the ownership should be with the financier, even if it is for a short period. The best way to use Murabahah is that the financier himself purchases the commodity and keeps it in his ownership, or purchases a commodity through a third person, appointed by him as an agent, before he sells it to the customer. Murabahah has the following procedure. However, It should be noted that, though this is not encouraged, if a purchase is not an easy option for the financier, it is permissible that he makes the customer himself his agent, to buy the commodity on his behalf. The client and the institution sign an agreement where the institution promises to sell and the client promises to buy the commodities. An agreed profit is added to the cost of commodities. Thus at this stage the relation between the institution and the client is of a promisor and the promisee. Secondly when a specific tangible commodity is needed by the customer but the financier cannot purchase the commodity directly then, the institution employs the client as his agent for purchasing the commodity on its behalf. The agency agreement is signed by both parties. At this stage, the relation between the parties is that of a principal and agent. Thirdly the client buys the commodity on behalf of the institution and has it in his possession as an agent of the institution. Fourthly the client tells the institution that he has purchased the commodity on its behalf and at the same time, makes an offer to purchase the commodity from the institution. Lastly, the institution agrees to the offer and the sale is finalized. The ownership as well as the risk of the commodity is transferred to the client. At the fourth and fifth stage, the relation of the buyer and seller is evident between the institution and the client. And since the sale is done on

the deferred payment basis, the relation of the debtor and creditor also exists between them at the same time. All the five stages are mandatory to have a valid Murabahah. If the institution buys directly from the supplier, it does not need any agency agreement. The most crucial element of the transaction is that the commodity must remain in the risk of the institution, during the time between the third and the fifth stage. This is the only feature of Murabaha that differentiates it from the riba based transaction. It is also a compulsory condition for the validity of Murabahah that the commodity is purchased from the third party. The buying of commodity from the client on 'buy back' basis is not permissible in Shariah. The institution may ask the client to pay a security to its satisfaction for the timely payment of the deferred price. He may also ask the client to sign a promissory note or a bill of exchange, but it must be after the actual sales take place i.e. at the fifth stage mentioned above. Murabaha is not the ideal mode of financing. It is only a particular type of sale. Shariah considers Mudaraba and Musharika as the ideal modes of financing. However, in present times there are some problems in using Mudaraba and Musharika so they are not applicable in all financial transactions. Therefore, the contemporary Shariah experts have allowed the use of Murabahah as a mode of financing on deferred payment basis, but it should be exercised under certain conditions. Conclusion There are certain theorists and scholars who still claim that there are issues involved in the murabahah financing and its practical application is susceptible to errors. Some people still believe that murabahah transactions are similar to the mode of financing followed by convectional banks and simply changing a few procedures does not make it free from riba. Some people argue that the increase of credit price in murabahah is based on the profit calculation done based on the extention of time given to the client to pay for the commodity which makes it analogous to riba charged on loans, because in both scenarios an additional amount is charged for the deferment of payment based on the time frame allotted to return the payment for the commodity. In reality, this argument is based on a misunderstanding and to clarify, people need to understand the Islamic principles related to charactaristics of money and commodity. In Islam, when money is exchanged for money, no excess is allowed as money does not have any intrinsic value. In murabahah transaction, commodity, with an intrinsic value and specific quality, is exchanged for the money. Moreover time of payment may act as an ancillary factor to determine the price of commodity but not sole consideration as in money to money transaction. But the sale on deferred payment does not make the increase in price equivalent to riba. Because any excess amount charged against late payment is riba only where subject of matter is money on both sides, which is not in murabahah. Therefore when commodity is sold for money by a financier (seller), he can charge a higher price for the credit sale but the condition is

that the purchaser (client) should be informed about both cash price and credit sale price, in order to avoid any ambiguity. Another issure about murabaha financing arises because the price is payable at a later date, so in order to make sure that the seller/financier will get the price of the commodity paid on time, he might ask the client to provide a security to his satisfaction. The security can be a mortgage, a hypothecation or some sort of lien or charge. But the financier needs to ask for a security after he has sold the item and the price of the commodity is due to him because at this stage, the client is under the financier's debt after the murabaha price is set. Also, the sold commodity itself can be given to the seller as security but the financier will have to reimburse the damages in case the mortgage is destroyed or damaged under his possession.

In riba based loans, the amount of loan increases according to the period of default but in murabaha financing it cannot be increased once the price is set even in case of default. This condition may be misused by some people who would make late payments knowing there would be no increase. In order to resolve this, some contemporary scholars suggest that dishonest clients should pay compensation to the bank for the loss it may have suffered on account of default.The defaulter should be given a period of one month after the maturity date along with weekly warnings to pay the compensations. Secondly in case the client is defaulting due to poverty, he should not be penalised. Lastly the compensation is only allowed if the investment account of the bank has earned profit to be distributed to the depositors else it is not allowed. A lot of ulema do not accept this condition of penalty stating that any additional amount charged to the debtor is riba. They also say that even conventional banks allow a little grace period to customers so they can come up with the payments.Also it is difficult to judge whose claim about their financial condition is true. Lastly the penalty on defaulters has nothing to do with the investment account. An alternate solution to all these problems that the ulema agree upon as the right way and what islamic banks are now practicing is that in case of default in payment in murabaha transaction, the client will pay a specified amount to a charitable fund maintained by the bank/financer or to the bank/financer who would then give these funds to charity and not add any of the penalty payments to its income. Another criticism is that Islamic financing institutions in murabahah transaction use current interest rate (KIBOR/LIBOR) to determine their profit. No doubt the use of these benchmarks for determining the halal profit is not desirable. But still using them as benchmark in Pakistan by the financier does not make murabahah as invalid if it is based on Islamic principles and meets the prescribed procedure. However it is appreciated that Islamic banks should strive to formulate their own benchmark and create an market based Inter Bank rate on the Islamic principles. But as in Pakistan, all banks, Islamic or convectional are under supervision of State Bank of Pakistan and have to follow rules and regulations defined by SBP. Unfortunately Pakistan has mixed economic system that is not completely based on the Islamic principles and to resolve this issue of benchmark for profit rate need support from SBP and government. (please add two three sentences to conclude the report)

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