Bank must own goods under Murabaha facility
dubai — The Dubai Court of Cassation has stated in a ruling that Islamic banks or financial institutions should have the ownership of goods prior to selling them to the customer under a Murabaha contract to be valid.
The court said in the landmark ruling that banks will have to meet certain objective criteria to make Murabaha contracts as Shariah-compliant. And if the court is not satisfied with these criteria, the contract may be deemed null and void by the court. The UAE’s leading legal firm Baker McKenzie Habib Al Mulla said on its website and termed the ruling as landmark.
While explaining the case, the court revealed that in this case, the customer (the defendant) argued that the Murabaha contract in question was essentially a loan agreement with interest as the goods under the Murabaha contract were never delivered to or received by him. The customer further claimed that that he only received funds (and not any goods or commodities) and he simply had an obligation to return the funds to the bank together with interest in due course.
Another submission by the customer was that a Murabaha in nature is a sale contract where the financier buys the goods or commodities in question, owns them and then resells them on to the customer on a principal plus profit basis. If the role of the financier is merely to finance the deal (without the proper purchase of goods), then this would constitute usury, which is prohibited under Shariah. The Court ruled that this defense is a valid one and that the Court has an obligation to look into the nature of the Murabaha contract to ensure that the criteria has been satisfied.
“Whilst the conditions for the validity of a Murabaha contract as stipulated by the Court are not new, the fact that the Court has accepted the customer’s argument that the Murabaha contract in this case was simply a veiled conventional bank financing (including an interest component) is a significant development in such claims,” said Baker McKenzie Habib Al Mulla.