The Art of Islamic Banking and Finance: Tools and Techniques for Community-Based Banking

were able to adapt it in a way that makes the financing closer to the require-
ments of Shari’aa and to expand its use in the development of the ‘‘Islamic’’
asset-based bonds (sukuk.)

ISLAMIC BANKING MODELS

The following is analysis of the Islamic banking models designed to fit the
existing conventional finance contracts to make them Shari’aa-compliant.

The Cost-Plus (Murabaha) Model
This mode of financing (in Malaysia it is calledAl Bai’ Bithaman Aajil,or
BBA) was developed to finance trade transactions in a riba-free format.The
Institute of Islamic Banking and Insurancemagazine (London, the United
Kingdom)^2 responds to reservations and criticisms made by many Shari’aa
scholars, as well as users of murabaha ‘‘Islamic’’ finance models and con-
tracts, by stating that we should not‘‘... ignore that the basic Islamic
finance structures adopted today were used primarily in trade in the early
Islamic period.’’ The article further states that

Murabaha [cost-plus], in its original Islamic connotation, is simply

a particular type of sale, not a mode of financing. The only feature

distinguishing it from other kinds of sale is that the seller in Mura-

baha [cost-plus] tells the buyer the cost incurred and the profit

(mark-up) on the cost.

The magazine also quotes retired Justice Muhammad Taqi Usmani:

There are two essential points which must be fully understood

in this respect: 1) it should never be overlooked that, originally,

Murabaha [cost-plus] is not a mode of financing. Therefore, this in-

strument should be used as a transitory step... and its use should

be restricted only to those cases where Musharaka [joint ownership

with diminishing equity] is not practicable; 2) the Murabaha [cost-

plus] transaction does not come into existence by merely replacing

the word of ‘‘interest’’ by words of ‘‘profit’’ or ‘‘mark up.’’

The article further states that:

Murabaha [cost-plus], though not an ideal model in Shari’aa com-

pliant finance, was adopted initially for home purchase in the UK in

the late 1990s, as pure Musharaka [joint ownership with

Islamic Banking in the 20th Century 207