musawamah

United Kingdom

A commodity trading arrangement similar to murabaha financing. The customer requests the bank to purchase certain assets or commodity from a third party. Unlike a murabaha (where a buyer knows the cost of the underlying asset), in a musawamah, the price of the commodity is unknown to the customer. On acquiring the commodity, the bank adds its profit amount and offers to sell it to the customer who has the right to accept, refuse, or negotiate the price. If accepted, the customer repays the total amount to the agreed instalments. A musawamah usually occurs when it is difficult to determine what the cost of a particular good or service was, or when the good is comprised of products.

In order to comply with Sharia, there are a number of restrictions on a musawamah:

• The underlying asset must be in existence and in the seller's possession at the time of the sale.

• The sale must be immediate; future sale dates are void.

• The asset must be of value and be usable.

Related terms:

Sharia