Comparing Mudharaba and Murabaha: Understanding Financial Contracts for Purchase Orders

Dr Saleh Al KharusiSharia Compliance Advisor at Mamun

Distinguishing between financial contracts is of paramount importance, as it allows parties to identify the appropriate contract for their circumstances and in line with their conditions. ⁠ ⁠Among the prominent financial contracts are Mudharaba and Murabaha for the ordering party, as they are widely used. Therefore, it is important and beneficial to understand their provisions and compare them.

First: Definition

Speculation is a profit-sharing contract where one party provides capital, referred to as the financier, and the other party provides labor, referred to as the speculator. As for murabaha for the ordering party, it is the sale of goods at a price equal to the seller's purchase price, based on the ordering party's request, with an agreed-upon profit markup.

Second: Purpose

The purpose of speculation is the growth and utilization of capital through trade and profit-making, while the purpose of murabaha is acquiring and owning goods, whether their value will increase or decrease in the future.

Third: Relationship between Parties

The relationship in speculation is based on participation, where one party provides capital (financier) and the other provides effort, expertise, and time (speculator). They also share in the profit upon realization. This type of partnership is driven by the financier's lack of expertise or time to engage in commercial activities. In contrast, in murabaha, the relationship is based on selling, with one party obligated to deliver the goods and the other to pay the price. The ordering party may instruct the seller to purchase the goods from the market and then buy them with an agreed-upon profit markup.

Fourth: Profit and Loss

In speculation, both parties share the profit based on their agreement at the contract's inception, usually in proportion. However, a predetermined amount for either party is prohibited. Loss is also shared, with the financier losing their capital and the speculator losing their effort and time. However, the speculator may be liable to compensate the financier if they breach the terms. In murabaha, the seller bears both profit and loss alone, as it's a sale contract.

Fifth: Guarantee

Speculation is originally based on a trust contract, with the speculator responsible for the capital. However, the speculator is not obliged to provide any guarantee to the financier unless proven negligent or in breach. In murabaha, the buyer may be required to provide collateral or guarantees to ensure payment.

Sixth: Place of Contracting

In speculation, contracting occurs through trade by buying and selling goods, either unrestricted or subject to specific conditions set by the financier. In murabaha, the buyer purchases goods on behalf of the seller, with specific conditions regarding payment and documentation.

Seventh: Agency

In speculation, there is no agency contract between the financier and the speculator; the mere delivery of capital grants the speculator authority to engage in speculation. In murabaha, the seller typically purchases and sells the goods themselves but may appoint the buyer as their agent under specific conditions.