Comparison of theory and practice of Murabaha financing in Islamic banking

Abstract

Modes of financing in Islamic banking system are generally categorized as Shariah based financing like Musharakah, Mudarabah and Shariah compliant financing like Murabahah, Ijarah etc. Islamic banks should have implemented and promoted Shariah based financial tools but instead they have been frequently using Shariah compliant modes specifically Murabahah due to some valid reasons. The main objective of the paper is to compare the practical aspects, operations and procedures of the one of the financial product Murabahah with theory by inspecting the financing and operational records of Bank Islami Ltd and Bank of Khyber (Window Islamic) as Islamic banks are the representative of this product. The study has replied all the depths of the paper as questioned and has made known the procedure in executing such transaction. The study also explains clearly Islamic finance and Islamic banking and describes briefly the theoretical frame work of Murabahah transaction stated by some Islamic jurists like Mufti Taki Usmani. Murabahah is still a leading and widely used financing technique in comparison with other Islamic methods of finance. It has played a major role in the growth of Islamic banking and finance industry. The attitude of Islamic banks while practicing Murabahah is largely focused on to mitigate the risk as much as possible and make it a close alternative to conventional loans.