The issue is not how this product is structured. The real issue arises when commodity murabaha is undertaken by a conventional financial institution.

There is nothing wrong with commodity murabaha transactions from a sharia perspective. The products are typically used as a pure commodities trading facilitation, as a tool for deposit taking and in some part of the world, particularly the Gulf Cooperation Council (GCC) countries as a financing product.

As a product it is 100 percent sharia compliant under the concept of Tawarruq Bi-ghairi Munazzam and is unanimously accepted by all sharia school of laws. Even the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) says commodity murabaha is not invalid. Whether it is ideal or not is irrelevant as it is sharia compliant. Close resemblance to conventional instruments is also irrelevant.

The issue is not how this product is structured. The real issue arises when commodity murabaha is undertaken by a conventional financial institution that is not governed by any laws that require a 100 percent sharia compliant business operation as it may result with the product being abused.

The abusers normally defend themselves simply by saying the commodity murabaha as a sharia compliant product does not require them to identify how the proceeds from the product are used. They even say the sharia makes it unlawful for identification of proceeds utilisation under a sale of goods as the seller cannot dictate to the buyer how they must use the proceeds. This argument is valid for a straightforward commodities trading activity. However, it cannot hold water when it comes to financing or deposit-taking activities.

The abuse for financing is very limited as it is very difficult to defend financing of a company for non-halal business purposes like the financing of an Indian conventional bank in the Gulf of Cooperation Council (GCC) countries. The deposit taking business is where the product is unfortunately most abused. The leakage into the conventional market has caused the Islamic financial market to suffer.

An example is the lack of liquidity in the primary and secondary sukuk market. The above leakage in the global/GCC market reduces the amount of Islamic funds chasing after sukuk instruments. It also forces Sukuk issuers to rely solely on conventional riba investors (who control the majority of Islamic funds due to commodity murabaha) to buy their sukuk. This resulted in a premium pricing of about 20 basis points over conventional bonds in the global bond market.

In contrast, Malaysia’s sukuk pricing is between 3 to 20 basis points cheaper than conventional bonds. The reason for this is because Islamic funds in Malaysia which cannot leak into the conventional market are forced to chase after Islamic assets thus boosting the demand for sukuk.

With conventional funds also chasing after sukuk the demand for sukuk becomes bigger allowing for greater price tension, thus better pricing. All in all, commodity murabaha as a product is fine under shariah, its abuse is not. It must be regulated by all regulatory bodies that are serious in developing a robust Islamic financial market.