Difference between Murabaha and Conventional loan PDF

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A comparison of murabaha contract and conventional loan...

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COMSATS University, Islamabad Department of Management Sciences Fall 2021

Assignment #2 Dated: October 2nd, 2021

Submitted By Mohammed Mustansir FA19-BAF-070 Submitted To Dr. Sabeen Khurram

Compare the Murabaha contract with the counter contract with the conventional bank. ANS: Murabaha contract also know as cost plus financing, a common mode of financing used in the Islamic banks. Murabaha refers to a sale in which seller discloses the cost of the underlying commodity and the profit charged in the form of mark up. It is important to note that the Murabaha contract is not an interest bearing loan as compared to it’s counterpart, conventional loan; a interest bearing loan offered by the conventional banks. In Murabaha contract the bank purchases a commodity as per the requisition of the client. Here the bank is bound to disclose the cost of the underlying commodity and the profit charged on it. In Murabaha the price of the contract is fixed and cannot be changed at a later date and although the payment can be done on spot or installments or a combination of both. Murabaha contract complies with the risk sharing principle of Islamic finance system where as the conventional loan puts the whole risk on the debtor’s shoulders. A Murabaha contract is only valid for fresh new assets and buy-back arrangement is prohibited, where as a conventional loan can be taken for any purpose. The key difference between Murabaha and conventional loan is of the contract structure. Murabaha is a sale contract in which both the cost and profit charged on the commodity are known where as, a conventional loan, is simply an interest based lending agreement, in which a loan is advanced and interest is charged upon in which is strictly forbidden in Islamic financial system....