TRANSACTION-BASED MUSHARAKAH / MUDHARABAH (TBMM)

INSTEAD OF
BANKING MURABAHAH1

ENDER TOSUN
ISTANBUL, 2019

1 INTRODUCTION

In this paper, I will emphasize and propose two new2 instruments that seem to be
extremely beneficial in the practice of finance based on Islamic rules, principles
and values. In this respect, I will argue that they can replace to an important extent
the murabahah, which seems to be problematic in some of its fundamental aspects.
These two instruments, I will call, “transaction-based mudharabah” (TBMD ) and
“transaction based musharakah” (TBMS ).
On the other hand, there is a fundamental similarity between these two instruments
in that they are both based on profit loss sharing. Because of this similarity, it is
expected that within the terms of a related agreement between an Islamic bank (IB)
or any other Islamic financial institution (IFI) and an economic agent, there may be
just certain articles which stipulate elements of both musharakah and mudarabah,
which can be flexibly applied on specific transactions depending upon the needs
related to a specific transaction. Therefore, throughout this paper I will take them
as a combined instrument, and call it transaction-based musharakah/mudarabah
(TBMM).

2 BANKING MURABAHAH

2.1 DEFINITIONS

Classical Murabaha: “Is a cost plus profit sale. It refers to the sale of an item by the
same price that is bought by the seller with an increase in the profit that is agreed
1
Copyright © Ender Tosun & Bilen Certified Financial Consulting & Audit Inc., published in Istanbul, 17.02.2019,
Ender Tosun & Bilen Certified Financial Consulting & Audit Inc. Publications. www.bilenymm.com
2
Within the literature about musharakah and mudarabah that I searched, I could not find any emphasis related to
transaction-based musharakah and mudarabah as depicted in this paper.
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upon with a percentage of the price or a sum of money without a prior promise
and it’s a kind of Bay’ Amanah (AAOIFI, 2010, p. 103).” (See Mohamad Sabri
Haron et. al.)
“This transaction may be concluded either without a prior promise to buy, in which
case it is called an ordinary Murabaha, or with a prior promise to buy submitted by
a person interested in acquiring goods through the institution, in which case it is
called a ‘banking Murabaha,’ i.e., MPO. This transaction is one of the trust-based
contracts that depends on transparency as to the actual purchasing price or cost
price in addition to common expenses (AAOIFI, 2010, p. 120).” (See Haron et. al.)

2.2 PROCESS OF BANKING MURABAHAH

In murabahah, the process is as follows:

Here we see that goods and services flow like this: Seller (The real vendor or
manufacturer) > Seller (IFI) > Buyer
As and if the seller is the IFI, the default risk of the buyer is taken by the IFI. Hence,
this is less advantageous for the IFI. As the IFI is considered to be direct seller to
the buyer, normally, the seller (IFI) will be alone in bearing the default risk of the
buyer.

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 2.3 ONGOING CONCERNS ABOUT MURABAHAH

Banking Mudharabah is very important today in that a big portion of funds within
the Islamic banks are used through banking murabahah. Furthermore, it is a basis
for other key financial instruments such as sukuk.
Far from reaching any consensus about the compliance of current banking
murabahah practices, we observe that there are totally opposite views within
different schools; and more interestingly, the differences are quite fundamental.
The differences are not like choosing the group of a certain practice between the
obligatory (fard) and almost obligatory (wajib); but rather, between permissible
(halal) and impermissible (haram).
For example, after mentioning the school that consider current banking murabahah
admissible, Haron et. al., mention some schools that object to the banking
murabahah. Their summary of those schools is as follows: “The second school
based on the right of the option for both parties and the inadmissibility of the
binding promise. The study refers to some well-known scholars who had
authorized this way, like Rafiq Al-Masri and Sulaiman Al-Ashqar. The third
School declares the inadmissibility of the mechanism of the MPO3 contract that is
currently applied in the IFIs4, whether the way of the binding promise or the right
of the option based on the legitimate evidences. This school admits that Murabaha
with promise is considered as comprising two transactions in one transaction, and
it could be considered as a person selling what he does not have, and it may not be
allowed by Shari’a. The last argument is the procedures of the MPO are the same
as Bai` al-`Inah, which were forbidden by the Prophet Muhammad (peace be upon
him).”
They also emphasize that Al-Masri (1996) showed some practical examples that
show the absence of any difference between Murabaha with binding and usury.
Again, in parallel with these, as explained by Haron et. Al., “International Islamic
Fiqh Academy, Jeddah, which recommends the adoption of the right of the option
during the sales process. It also emphasized the need to own the item and to take
the risks until the buyer received the commodity.”
There are important variations within the implementation of murabahah. This
shows that there are not clearly defined principles and borderlines which enable the
IFI to stay within the defined boundaries when performing banking murabahah. For
example, in certain cases, even getting a copy of the proforma invoice and the order
to pay the seller is sufficient for some IFIs to transfer the murabahah funds to the

3
Murabaha to the purchase orderer
4
Islamic banks
3
account of the seller; where we do not see any invoice to the IFI; or from the IFI to
the end buyer.
Those controversies cause a key shariah risk in the implementation of murabahah.
They also quote the following from (DeRose, 2007): “Some previous studies have
shown the importance of reputation risks and non-compliance risk by their strong
impact on the banks and companies. A damaged reputation can lose companies
their customers, destroy profit potential and may lead to bankruptcy.”
Also, according to them, the Islamic financial services industry is a relatively young
industry, and a single failed institution could give a bad name to other banks that
do not engage in irresponsible behavior.
While these concerns are valid, I also think that according to the intention of the
related agents, it is difficult to say that in banking murabahah there is really an
intention to buy or to sell something on the side of the IFI. Generally they are not
spending efforts to provide a high quality, low cost product or service for those
who need them. They do not have showrooms, or websites where they present their
goods and services. It is impossible to say that they operate within any market
structure such as any competitive or oligopolistic or monopolistic frameworks
wherein “sales” necessarily happen regarding the goods and services they claim to
sell. Likewise, the agents which request murabahah funds, do not go to any IFI if
they need to buy a machine, or a building, or any hardware to find a good one. They
go to the sellers of those items; and if they do not have enough resources, they go
to the IFIs.
Hence, according to my opinion, murabahah within its contemporary widespread
practice, is really an issue of concern. An instrument accompanied with such big
concerns cannot be an established instrument for the world of finance in the long
run. In this state, it cannot sufficiently satisfy Muslims. Actually, when we talk to
businessmen sensitive about Islamic values and principles, we see obviously that
they are in doubt whether they comply with Islam, while using the banking
murabahah instrument. However, as there is no other alternative, they keep using
it.
I see murabahah as practiced today, only as a transitional formulation in the history
of Islamic finance toward financial instruments that are really and seriously
compliant with the requirements of shariah. Yet, murabahah as a classical
murabahah and fully compliant with the primary sources of Islam, can be widely
used if it is improved, and if it is relieved from being required to accomplish the
functions for which it is not appropriate. For this, we need to develop other tools
that are shariah compliant and more productive. In this respect, I think TBMM will
relieve the institution of murabahah from its controversial aspects, and unfair
burden put upon it.
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 3 TRANSACTION-BASED MUSHARAKAH AND MUDARABAH

3.1 GENERAL CONSIDERATIONS

As explained above, musharakah and mudarabah can be practiced based on

projects. This project may be the sale of services or goods.
The essence of murabahah is financing. Financing theoretically can be provided to
the buyer or to the seller. In Islam, funds are paid in any case to the seller side, as
long as there is an increment. This is what happens in murabahah as well: The buyer
does not get any money directly from the financier, it is the seller who gets the
payment, even though it is the buyer who is financed. But if this is the case, and if
we agree that there is no way that the buyer can get resources directly from the
financier, except through financing with no increments, then we should restore the
process based on its essential elements. We have to use the instruments that are
perfectly fit for financing from the seller side: That is through musharakah and
mudarabah.
Within the resources I browsed, regarding the validity of musharakah or
mudarabah, I did not find any one setting a minimum amount of money or any
indispensable necessity for an organic relationship between the provider of funds
and those who need them. Therefore, there is nothing that prevents an Islamic bank
financing just the sale of one machine through musharakah or mudarabah. This
model will remove all concerns that arise with murabahah.
Murabahah gives the impression of dishonesty: Trying to make a financing activity
looks like a sale activity. Why should we need to use murabahah while we can use
transaction-based musharakah or transaction-based mudarabah or transaction-
based combination of musharakah and mudarabah?
In the following I will explain how this can be done.

3.2 DEFINITIONS:

Regarding the definition of musharakah, Dr. Muhammad Imran Ashraf Usmani

makes the following explanation:
“The literal meaning of Musharakah is sharing. The root of the word “Musharakah”
in Arabic is Shirkah, which means being a partner. It is used in the same context as
the term “shirk” meaning partner to Allah. Under Islamic jurisprudence,
Musharakah means a joint enterprise formed for conducting some business in
which all partners share the profit according to a specific ratio while the loss is
shared according to the ratio of the contribution. It is an ideal alternative for the
interest based financing with far reaching effects on both production and
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distribution. The connotation of this term is little limited than the term "Shirkah"
more commonly used in the Islamic jurisprudence.”
He adds: “It is evident from this discussion that the term "Shirkah" has a much
wider sense than the term "Musharakah" as is being used today. The latter is limited
to "Shirkat-ul-Amwal " only i.e. all the partners invest some capital into a
commercial enterprise, while the former includes all types of joint ownership and
those of partnership.”
Since shirkah can be used on any levels, such as levels of goods, it will not be
against the shariah to use the term musharakah on larger needs. In this paper, I use
the word “musharakah” not in the above mentioned limited sense, but as a word
that relates more to its origin word “shirkah” which is directly recognized by the
primary sources of Islam and which has a wider and more flexible meaning.
Mudarabah is explained by Iraj Toutounchian as follows: “The most-widely
known Islamic contract, is a profit sharing contract in which one party (the Rab al
Maal) provides funds and the other (the managing trustee, the Mudarib or Ameel)
management expertise.” … “While the literature extends this contract to include
investment and launching a project, we confine ourselves here to trade activities.
Profits are shared between the Rab al Maal and the Mudarib in a proportion agreed
in advance. Losses, if any, are the liability of the former, and the latter loses his
share in the expected profits.”
Transaction-based musharakah/mudarabah (TBMM): Musharakah and/or
mudarabah, that is separately and distinctly based on or related to a transaction,
part of a transaction or a group of transactions, though the terms and conditions
related to all related potential transactions may be stipulated in a general agreement,
and which is performed separately or in a combined way, between a seller of goods
and/or services and an Islamic financial institution or another sharik.
All sales have a financing aspect. In TBMM, the financing aspect of the transaction
is undertaken by the IFI fully and/or partially and/or after and/or before a certain
point in time in the life of that transaction. The transaction in this definition means
any sale or group of sales of any goods and/or services, including leasing.

3.3 PROCESS OF TRANSACTION-BASED MUSHARAKAH/

MUDARABAH

The relationships between the related elements of TBMM are depicted in the
following flowcharts. This section is intended to be simple to give the general

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framework. The following sections will explain the details and specifics with
different examples.
Simply put, the process is as follows: Seller (Vendor + IFI) > Buyer
As shown in the following chart, the good/service including the payment terms is
produced within the partnership together by both Company X 5 and Islamic
financial institution:

In the following flowchart, the flow of the risk is included. As the Company X and
IFI constitute a partnership, the default risk from the buyer is shared by Company
X as well as IFI.
The dotted lines show the flow of the payment risk by the buyer, and implicitly the
flow of related profit/loss. The risk is shared by IFI and by the other sharik/ or
mudarib.

5
Company X is the company that for each transaction and along with IFI brings together the requirements for the
provision of the goods and services.
7
The following flowchart depicts the contributions of each partner in the TBMM.
Company X and IFI bring together their financial resources and entrepreneurship
based on a certain transaction. They bring together and pay the claims for the
factors required to produce the goods and services needed by the buyer. And the
related goods and services reach the buyer.

8
The following flowchart depicts the flow of the cost, profit, loss that constitute the
payment of the buyer to the TBMM partnership. As Company X and IFI constitute
a partnership, the risk is shared by them. How the risk is shared can be determined
by both partners in the TBMM contract based on their contributions regarding each
transaction, and it is possible that they determine this within a general framework
contract.

3.4 EXAMPLES ABOUT THE PROCESS OF TRANSACTION-BASED

MUSHARAKAH / MUDARABAH

Let me explain the processes of transaction-based musharakah and mudarabah

(TBMM6), within the following examples:
3.4.1 EXAMPLE 1

In the different scenarios of the first example, I will explain the practice of
musharakah7 within limited contexts. Each following scenario will describe a
scenario where the musharakah is further limited. The last version, will show the
musharakah with the narrowest scope in our context8, which is TBMM.

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From now on, we will use TBMM as one combined instrument, since the distinction between musharakah and
mudarabah is only trivial in our context. We suggest further studies about the formulation of TBMM with the use of
different weights and elements of musharakah and mudarabah.
7
I will omit the detailed considerations between musharakah and mudarabah, since we examine them under the
same concept of TBMM.
8
In fact, in the example, the sub-element of the transaction is financed through musharakah. However, in any case,
the musharakah would be related to a minimum of one transaction, whatever is that transaction. Hence, as the
minimum amount of transaction that can be wholly or partially financed is 1 unit (of transaction), we call it
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The following scenarios illustrate situations where even though the scope of
TBMM becomes narrower up to one transaction, as long as the profit/ loss sharing
along with secondary requirements of musharakah are respected, there will be no
problem in terms of shariah compliance. The size or the scope of the musharakah
is not an element that reduces the validity of musharakah. To put it simply, even if
one transaction is performed under a musharakah agreement and according to its
general procedures, it is again a musharakah and compliant with shariah.
In the following example and scenarios, I give details about how TBMM financing
can be put into effect. First three scenarios are not about TBMM, however, they are
used in order to give an idea about the application of musharakah/mudarabah within
limited scopes. When it is applied even within a specific transaction, or for some
elements such as the financial element of a specific transaction, we can talk about
TBMM. As such, TBMM provides a great flexibility; and incorporates most if not
all benefits of murabahah while not containing its shortcomings.
3.4.1.1 SCENARIO 1 WHERE THE MONEY OF THE PARTNER (SHARIK) HAS
NOT YET BEEN USED FOR ANY SPECIFIC ACTIVITY, BUT HE IS
ENTITLED TO THE PROFIT

F Furniture Ltd. Liability Company (FLC) is a small company which sells tables
and chairs in its showroom. At a certain time, it has in its assets side of its balance
sheet the following key items:
Cash (in banks): 5.000USD
Inventory: 100.000USD
The owner of the company, Mr. Brown sees that the liquidity of the company is far
from being optimal. He approaches his friend Mr. Green, and makes the following
proposal: “Our sales are good, but our liquidity is not good. I am worried about
some liquidity bottle neck. So, we know each other for many years. If you want
you can be a partner (sharik) in my company. If you invest 30.000USD in my
company, then I will give you one third of the profit, starting from the day when
you paid the money.”
Mr. Green, knowing the owner of the company, makes his researches; they both
make their calculations; and Mr. Green agrees on the proposal. All formalities are
completed and He pays the money on the 25th of June 20XX. Mr. Brown makes his
profit calculations as of 30th of June 20XX, and tells Mr. Green that upon the sales
between 25th and 30th of Jun 20XX, corresponding to the period wherein the
musharakah agreement with Mr. Green is in power, the company made a net profit
of 3.000USD . As of 30th of June 20XX, the money paid by Mr. Green is still in the

transaction-based musharakah/murabahah instead of something like “elementary musharakah/mudarabah” or

“transaction-part-based musharakah/mudarabah”.
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bank and it was not used for any procurement of any goods or services. They agree
on the calculations, and the money is paid to Mr. Green.
Here I would like to underline the fact that the money provided by Mr. Green has
not yet been used for buying anything. Yet, he is entitled to the profit according to
the musharakah contract9.
3.4.1.2 SCENARIO 2 WHERE MUSHARAKAH IS MADE FOR A LIMITED
PERIOD

In this scenario, where other things are mostly the same with Scenario 1, when Mr.
Brown approached Mr. Green, Mr. Green replies as follows: “We can do that. But
I will need my money one year later. So, can we do it just for one year, and can I
get my money at the end of one year?” Mr. Brown says: “Yes. We can do that.”
So, they agree upon that. The money is put in the company under this contract. The
legal procedures may be as injecting equity into the company; so that later the
shares of Mr. Green will be sold to Mr. Brown who expect to find another sharik
or to receive some money to buy the equity of Mr. Green. Or, it may be shown as
debt if the specific accounting regulations of the related country does not allow to
show it as equity10. However, legally and from an Islamic point of view, this will
not be a debt, but equity since essentially, Mr. Brown guarantees neither any fixed
return, nor the principal if there is a loss.
3.4.1.3 SCENARIO 3 WHERE THE INVESTED MONEY IS ALLOCATED TO
PARTIAL ACTIVITIES OF THE COMPANY

All else being the same, Mr. Green says to Mr. Brown: “I would like very much to
be your sharik in your activities, however, I do not think that your chairs are good,
and I do not think that the market for chairs is going well, so probably you will not
make money out of chairs. However, we can do it for tables; so, if you accept you
will just use my money for the tables, and I will get only profit (or loss) from the
tables; but I will not be getting any profit or loss from your activities on chairs.”
Mr. Brown agrees on that.
3.4.1.4 SCENARIO 4 WHERE THE INVESTED MONEY IS USED ONLY FOR A
SPECIFIC TRANSACTION

All else being mostly the same, Mr. Brown additionally says to Mr. Green: “As we
are tight in liquidity, even though when reliable clients come to buy our furniture
in installments, we cannot give them good payment terms. Because, for example if
we sell a table on installment, we cannot pay our wholesaler so that they can ship

9
Please note that we do not enter into the details related to the aspects of mudarabah and musharakah, since these
differences are trivial regarding our main arguments.
10
This is an issue to be developed and regulated in terms of accounting and financial reporting. However, I will not
dig for any solution to this issue in this paper, and I will focus on the essence within the context of the paper.
11
our order. Nor can we pay for the raw materials and production costs of our
manufacturer if we need to sell something according to the specifications of the
client. Therefore, we are only able to sell on spot payment, and so, we are losing a
lot of profitable business.”
Mr. Green replies: “I bought with most of the money that I told you I was keeping
for investment, a real estate. Just 7.000USD of it remained investable. I know you,
but I know also that you can face some financial problems. However, if there is a
good client that I know, and if they want to buy not too small a furniture, I can give
you this money so that you can make your manufacturer manufacture that furniture
or so that your wholesaler ships it to the client. But either the client must pay me
directly the installment payments, or if you collect these payments, we should make
sure that you pay me my principal and my profit as long as you are able to collect
them. As I am sensitive to shariah, if you cannot collect these amounts, we will
share the loss as well. Of course, I can ask also a collateral from the client
depending on who he is. And essentially, I want 20% of the profit that you make11.
But if the client needs a too short or too long payment date, we should renegotiate
how we will share the profit. Also, if the client forces you too much in the
negotiation or if you have allocated too much time/labor12 in the transaction, we
can renegotiate things.”
Mr. Brown agrees on these.
We see in this scenario that it is clearly a musharakah agreement.
3.4.1.5 SCENARIO 5 WHERE THERE IS A MIXTURE OF THE ELEMENTS OF
THE ABOVE SITUATIONS

In this scenario, all else being like in Scenario 5, Mr. Green gives the 7.000USD as
explained in the previous section. Yet within these days, just before this amount is
paid to the wholesaler of that table, a supplier pressed for a payment, and the
7.000USD from Mr. Green is paid to the other supplier, since another 7.000 was
expected to come from another client, Mr. Brown considered that that amount could
be wired to the wholesaler of that table. But Mr. Green had already secured the
amount that the buyer of that table would pay with deferred payments. And the
table has been delivered to the buyer of that table.
In this scenario, there is a combination of Scenario 1 and Scenario 4. The equity
came for the table; however, it is used as cash for another transaction, to pay a
different debt. In this scenario, again, I think there is nothing which aborts or
reduces the validity of musharakah. Because, the principle given by Mr. Green is
not unconditionally expected back with any fixed increment. In case the buyer of

11
We do not get into the details of the profit sharing calculations depending on the terms of the specific payments,
as these issues are trivial.
12
In most situations, the percentage share of profit can be negotiated using the principles of mudarabah as well.
12
that table does not make his payments, then Mr. Green will not be expecting any
payment from Mr. Brown.
3.4.2 EXAMPLE 2
C Cranes Inc. (CCI) manufactures and sells cranes. Some of its customers, need
financing and are sensitive regarding shariah compliance. These and some other
customers do not want to try to find financiers, they just want to buy cranes but pay
on deferred basis. Or even if they do business with some banks, they want to see
whether CCI can offer them better payment conditions compared to what they can
get from their banks. B Islamic Bank Inc. (BIB) finds out the situation. It
approaches CCI, and they negotiate. At the end of the negotiation and policies of
each company, they agree that for each sale, whenever CCI needs, the BIB “may”
choose to be the TBMM partner of CCI regarding a specific transaction. BIB gives
CCI the list of kinds of transactions that it can enter in TBMM partnership; and
what profit it expects for specific payment terms, types of transaction and buyers
of cranes.
Based on the school of thought or adopted international Islamic standards, the share
of the profit on the relevant transaction is defined in the agreement between the two
parties. It can also be formulated as TBMD or TBMS. For example, if CCI planned
receiving a 10% profit an a spot sale, and if BIB aims at getting %0,7 profit based
on any transaction that it finances for a month, then for a sale that will be paid by
the buyer one month later, CCI will receive its sale price on the spot from the BIB,
and BIB will receive from the buyer that price plus its own profit.
C Islamic Bank Inc. (CIB) is also interested in the business potential with CCI. So,
it approaches CCI, offering better terms for certain types of transactions. More
specifically, it offers CCI lower profit rates for longer term transactions. And for
some customers it says that it may not require any collateral. The CCI takes the
offer of CIB as well.
For any potential customer that demands any crane(s), CCI communicates the
relevant demand to the IFIs with whom it works. For some customers one of them
gives better offers, for some of them, the other.
On the other hand, the above model may also be initiated by a buyer. For example,
D Construction Ltd. Company (DCL) needs to buy a crane, and after it searched
found out that CCI sells high quality cranes which are also reasonable in price. It
goes to BIB and tells the situation and asks what they can do. BIB contacts CCI,
and initiates finalizes the above process. And enables CCI provide DCL with good
deferred payment terms. It can also get necessary collateral from DCL.
A question may come to mind:

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In the above explained procedures, it is not clear where musharakah or mudarabah
starts. Does not it look like a financing activity again?
The answer would be as follows:
Financing and resources are essentially the elements of commercial transactions.
And every transaction has a time component. The time period of a transaction
generally starts with the contract or sometimes with the preparations for the
contract, and is concluded with the performance of the duty of each party. From
the perspective of the buyer, it ends with the payment of the due amounts. When
CCI sells the crane, its giving its client the possibility of a payment on deferred
basis is also an element of that transaction. CCI may need support for being able to
give that possibility. It is not necessary that it will use the payment for any specific
supplies; it is not necessary that it immediately distributes the profit. It may just
need to share the risk of the payment, or it may be willing to benefit from the
collection organization and experience of the IFI, without which, it may see itself
incompetent in these functions. In TBMM, when CCI sold the crane, it is not done
with the transaction; it is still part of it until the related amounts are collected13 by
its partner which is the IFI. Though, it is also possible according to TBMM that the
agreement stipulates that from then on, only IFI will be responsible for the
collection of those amounts.
When the seller sells an item on deferred basis, it expects a higher price. This is
considered legitimate according to shariah, by most scholars of Islam almost
unanimously. The profit that corresponds to the addition of the opportunity to pay
on a deferred basis will be shared with the rab-ul-mal or with the sharik.
When the seller sells the good, the burden of waiting for the payment till the
payment side of the sale is accomplished is transferred to the IFI.

3.5 FURTHER DETAILS AND ACCOUNTING IMPLICATIONS

In TBMM, the IFI becomes a sharik or rab-ul-mal for the seller, for each TBMM
once the buyer agrees to buy the good or service on TBMM basis. The following
is also important about the details of the TBMM process. In order to give a more
complete idea about the processes of TBMM, I will explain the accounting
implications in a way to include stages that can be by-passed easily.
In terms of the statement of position (balance sheet) of the seller company, the
seller who has the related good in his inventory on the assets side, has debt or equity
on the liability side that corresponds to that inventory.
When the IFI agrees to be a sharik or rab-ul-mal for that transaction, the amount
that it pays to the seller for that transaction will be reflected as cash on the seller’s

13
We do not go into details such as guarantee period for the product, as they are out of the context of this paper.
14
balance sheet, and as quasi-equity on the liability side, under the equity. Under the
equity, because if for example due to the default of the buyer there is a loss, this
will be directly related to the equity of the IFI according to the percentages agreed
upon by the IFI and the seller; it is not a debt of the seller to the IFI14.
With the cash that the seller received from the IFI, the seller can pay its debt or
expenses or buy other assets. The total receivable from the sale of that good, still
remains on the seller’s accounts, though not necessarily. And the IFI has a quasi-
equity within that seller.
This equity may be collateralized by a collateral taken from the buyer.
It can also be collateralized from the side of the seller, not for a loss that can arise
related to the transaction if there is a default for that transaction, but for any
misconduct of the seller or a representative of any seller as a sharik or mudarib;
however, this collateral is not necessary.
When the IFI receives the payment from the buyer directly or through the seller,
the accounts of the seller that relate to the IFI will be closed with a reverse entry
and other entries for the related equity account and receivables account. However,
this can be done earlier as well if the IFI receives sufficient collateral from the
buyer and/or if the receivables of the seller are transferred to the IFI. If there is a
problem in the collection of the related receivables, then these amounts may be
transferred to bad debt; and related loss will be shared according to the terms of
agreement between the IFI and the seller.
Upon the collection of the receivables by the seller or directly by the IFI, the profit
that belongs to the IFI will be paid to the IFI along with the principal equity.
For services, the IFI will be the sharik; in service side, it is easier to understand the
issue in terms of musharakah and mudarabah, since the IFI will be more directly
involved as a sharik or rab-ul-mal or even mudarib.
The above is a version of TBMM with a heavy interaction between the IFI and the
seller. However, in a simpler version, the IFI can take over the role of the seller in
the stages following the point of meeting of the seller and buyer in terms of
financing aspects. In this situation, the presence of the IFI in the accounts of the
seller may be annulled or minimized after that point. This happens often in the
commercial life: For example, a project can be transferred to another contractor at
any stage, the collection of receivables can be transferred to another agent.

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For insolvency situations, there may be a need for additional legislation to regulate the rights of IFI in this respect.
However, as will be explained, it is possible to transfer the receivables to the IFI and close the equity account earlier.
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 3.6 BENEFITS OF TRANSACTION-BASED MUSHARAKAH/
MUDARABAH

3.6.1 ECONOMIES OF SCALE AT DIFFERENT LAYERS

In TBMM framework, the related factors within the economy will go to the IFI as
sellers, instead of buyers.
Hence, TBMM has the advantage of huge economies of scale. Financing from the
buyer side does not have such an advantage. If each crane buyer goes to the IFI
applying for murabahah, each application is separate; and there is no potential to
organize big elements of the transactions and to create considerable value. But if
the crane seller goes to the IFI, it will have a bigger negotiation power, because the
IFI has a bigger profit potential. We all know that if we buy 1 unit of good, the unit
price will be higher when compared to a situation where we buy 1.000 units of that
good. So, both sides benefit from TBMM. And the IFIs will have more competent
departments that deal with huge amounts and real business, instead of individual
sales that do not enlarge their vision. They may even turn into management
consultants in the areas of their expertise.
The issuing value, will also benefit the buyer, since, the seller will have the
opportunity to provide its clients with lower financing costs and better payment
terms. In murabahah, the buyer is on its own when contacting the IFI. However, in
TBMM, the seller will use its negotiating power by being on the same side as the
buyer. So, the buyer will not be alone against the IFI. In murabahah, the buyer who
needs financing finds the good or service. And he also finds the IFI for financing.
Though he can choose to create synergies by working mostly with a limited number
of IFIs so as to increase the funds used from one IFI to increase his negotiating
power, he cannot increase his negotiating power against the seller, by cooperating
with the IFI. He faces both separately. This does not allow the creation of any
synergy, sharing any expertise, any economies of scale from the financing side. But
in TBMM, the seller goes to the IFI also in one way as the representative of the
buyer.
In micro terms, the IFI, instead of working on each individual crane sale file, will
work with the seller on big amounts, big policies for longer terms, for larger
regions, and also move to a better position upon its learning curve. This may allow
them even to develop partnership strategies with sellers or with the sectors of
economy. This also will open a way to have efficiently specialized IFIs and
departments within IFIs in terms of sectors, regions, and so on.

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The close relationship between sellers and financiers, will create lots of other
synergies.
3.6.2 MORE EFFICIENT RISK MANAGEMENT

With TBMM, IFIs will have a better risk management framework: High quality
buyers will agree that the sellers share their information with the IFIs, since IFIs
are also on the same side as the sellers, and sellers’ partners. IFI will exchange
information with the sellers in an organic way, especially about potential buyers
that are risky. TBMM enables the IFI to share the risk with the seller. In murabahah,
as there is no strong and permanent relationship between the seller and the IFI, it is
almost impossible to share the credit risk with the seller. The IFI is on its own, if
the buyer defaults. But especially regarding the high-quality clients, the seller may
be willing to share the risk with the IFI. Additionally, the IFI can help the seller by
indicating that a potential client has unacceptable credit risk.
On the other hand, the seller will share the risk of the default of its client, and will
benefit from the expertise of IFI about the rating of the clients, and about the
collection infrastructure which is generally much more specialized than the sellers’.
3.6.3 MARKETING ADVANTAGES SPECIFIC TO ISLAMIC
BANKS

Through the network of the sellers, IFI will have new acquaintance with other
potential customers and the mobility will increase. In murabahah or in conventional
banking this is not generally possible, since, the financier communicates mostly
and only with those that use the funds. But in TBMM, the financier recognizes and
communicates with both the seller and buyer.
TBMM will help the competitiveness of the IFI. When the IFI offers better
conditions to the seller, the sales of the seller will increase; IFI will increase its
capacity usage; widen its network. But in murabahah, the buyer who contacts the
IFI just tells the IFI to pay to the seller, so, there is only considerable relationship
between the buyer and the IFI. This has little potential to increase integration in the
economy. In TBMM, IFI is in intense relationship both with the seller and the
buyer. This has the potential of increasing the links within the economy, including
marketing network.
3.6.4 ADVANTAGES TO IMPROVE COMPETITION

TBMM will help improve the competition in the market. As the factors as buyers
will not need to divide their efforts, since they will not apply to the seller and to the

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financier separately, the related unnecessary costs will be less. Hence there will be
more competitive prices.
3.6.5 INCREASING THE QUALITY OF THE ECONOMY

Thanks to TBMM, the closer links of communication will increase the quality of
the economy and economic factors; and discard the actors in the economy that do
not work efficiently and honestly.
3.6.6 IMPROVING THE SHARE OF ISLAMIC FINANCING

TBMM will increase the share of Islamic financing within the whole finance of an
economy. Note that, the situations wherever the IFI needs to give up certain things,
such as its strong position against the buyer, will create a competitive advantage
against the conventional banking actors in favor of IFIs. Because in conventional
banking, the ties are only through money and collateral, hence superficial. But in
Islamic banking especially through TBMM, the relationships are quasi-organic and
deeper, whereby making the IFI much more competitive and in a more advantaged
position compared to the conventional banking actors.
Closer relationship between IFI and a specific seller will reduce the selling capacity
of the competitor of that seller if that competitor does not use the same instruments.
So, the demand for the products and services of IFI will increase.
3.6.7 MORE EFFICIENT USAGE OF OTHER FINANCIAL
INSTRUMENTS

Regarding credit cards, TBMM opens new horizons. To formulate credit card usage
in sufficient compliance with shariah, within the murabahah framework is very
difficult if not impossible. Because it is not possible for the IFI to be a seller of a
good that the buyer wants to buy in the middle of the night in a small town.
However, in TBMM, as the seller and the IFI are partners and in a continuous
relationship under an ongoing contract, whenever the seller sells something be it in
the night or in a small town, it is possible that it operates in the name of the IFI
partially or wholly. But in murabahah, the buyer is the client of the IFI; yet, the
seller must be the IFI. One can argue that the IFI will need then to make agreement
with all sellers. Yes, and this is possible: Any seller that uses point of sale (POS)
machine, can make a direct or indirect (through its own bank who centrally makes
agreement with the related IFI) agreement to make use of TBMM. It is quite easy
to formulate such agreements where the seller receives the expected spot payment;
and through interbank agreements, the IFI may collect its investment and profit. If

18
the buyer’s bank is another bank, then through interbank agreements, the relevant
bank will agree to pay the deferred payment to the IFI.
An important element in credit card transactions, is the increment that will be
received if the payment is late. In TBMM, the information that the IFI can get from
the seller may reduce that risk. Also, the IFI may use the powers that the seller has
over the buyer if there is default or delay. For example, in case of a delay, they can
agree that the seller will not deliver any further goods to the buyer.
3.6.8 SATISFACTION OF CUSTOMERS SENSITIVE TO
SHARIAH COMPLIANCE

As noted earlier, in the use of murabahah, numerous users are doubtful about how
much it complies with the shariah, though they want to comply with it. But in the
use of TBMM, this defect is removed, since musharakah and mudarabah were
directly practiced and approved by the Prophet (PBUH), and they are directly
undoubtedly related to any real sale. In TMBB, there is no need to make something
look like a sale. As explained above, this clarity of TBMM, will also remove the
reputation risk of IFIs. This will be a big contribution of TBMM, since it is a
spreading legend that regarding murabahah, IFIs are not any different than
conventional banks.

4 CONCLUSION

In this paper, we presented TBMM as an alternative to banking murabahah. TBMM

is an instrument which is truly distinct from conventional banking, in that it is not
merely a provision of money. It is especially advantageous in terms of real
economy, combining different factors through cooperation that is necessitated by
financial resources. We did not discuss the shariah compliance issues to a great
extent in this paper. However, I hope that such studies will be done in the near
future. In terms of economies of scale and efficiency of the whole of the economy;
in terms of Islamic banking potential to be actual; in terms of each unit of Islamic
banking, in terms of many financial functions as risk management and credit card
usage TBMM has big advantages. It opens new horizons for developing new sub-
instruments. It has the potential to replace doubtful murabahah practices and enable
financial institutions to really and distinctly perform Islamic financial
requirements.

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Ender Tosun & Bilen Certified Financial Consulting & Audit Inc. Publications,
Copyright © Ender Tosun & Bilen Certified Financial Consulting & Audit Inc.,
published in Istanbul, http://www.bilenymm.com/tbmmpb.pdf 17.01.2019

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 Works Cited

Mohamad Sabri Haron, Rashila Ramli, Malek Marwan Yousef Injas, Raghad
Azzam Injas, “Reputation Risk and its Impact on the Islamic Banks: Case of the
Murabaha”, International Journal of Economics and Financial Issues, 2015, 5(4),
854-859. http://econjournals.com/index.php/ijefi/article/view/1406/pdf

Muhammad Imran Ashraf Usmani, “Meezan Bank’s Guide to Islamic Banking.”

https://islamicmarkets.com/education/definition-and-classification-of-musharakah

Iraj Toutounchian, “Thoughts from Iraj Toutounchian’s Islamic Money &

Banking: Narrated by Camille Paldi”.
https://islamicmarkets.com/education/mudharabah

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