Murabaha and interest-based loan: what is the difference?

Abstract

Many people, whether Muslims or non-Muslims believe, that the sale in Islamic banks is nothing more than disguised ribawi credit, namely conventional bank credit, this is because the interest rate on a conventional bank loan is equal to the profit on sale.  The practice of Islamic finance and Murabaha in particular, has given rise to ambiguity as to the specificity of this product, and its superiority to conventional credit. Despite claims that Murabaha complies with Sharia law, unlike bank loans, people don't understand the interest behind this reformulation, which ultimately leads to the same result. The primary aim of this article is to highlight the importance of Islamic principles through a comparison between Murabaha and interest-bearing loans. To answer this question, we have worked on the basis of a conceptual and classical review of both the Koran and Sunna, and the opinions of Muslim jurists. We adopted an explanatory and comparative analysis to understand the concept of Murabaha and Riba. This will enable us to understand the rationale behind the prohibition of Riba, and of interest-bearing loans in particular and thus come to understand the advantages of selling in Islamic finance compared with conventional credit. The result of the analysis shows that Murabaha is different from interest-bearing loans. The fact that two actions lead to the same apparent result in no way implies that they are of the same nature. The difference lies in the objectives pursued by the Sharia (Maqasid al-Sharia), and the establishment of specific economic principles. If the customer can't find a financial advantage at his level, that advantage is to be found at the level of the economy as a whole.

Keywords: Riba, interest rate, Murabaha, Islam, profit

JEL Classification: E13, E49, G19  

Paper type: Theoretical Research