46 Islamic Finance in Practice
agreed with the customer and obtains title of the house before selling it
to the customer;- The two parties (the bank and the customer) sign themurabahasale
contract for the agreed new price (which is the cost plus the profit) to be
paid over the term of the contract, and the bank transfers the legal title
to the customer; and - The customer pays the new price through monthly instalments. The
bank cannot change or increase the sales price after concluding the
murabahasale. Any increment on the sale price would be considered
interest.
The whole of themurabaha-based home finance transaction is to be
completed in two different sale contracts: one through which the bank
acquires the house, and the other through which the bank will sell the house
to the customer.Themurabaha principle creates a fixed, predetermined indebtedness.
This has made themurabahaprinciple attractive for Islamic banks as an
alternative to interest rate based transactions. However, this mode of
finance receives some criticism as it incurs high transaction costs and is
inflexible compared to interestbased transactions.
Murabahais a sale contract, this means that the sale price will not change
for the duration of the contract. Therefore, themurabaha-based instrument
provides a fixed rate of return on home finance.