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An Analysis of Murābaḥah and Ijārah Muntahiyah bi-t-tamlīk: How Do Islamic Banks Choose Which Product to Utilise?

In: Arab Law Quarterly
Author:
Ahmed Mansoor Alkhan Assistant Professor, Department of Islamic Banking, University of Bahrain Kingdom of Bahrain

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Abstract

Contrary to its conventional counterpart, which uses interest-based methods of financing, Islamic banks commonly use sale, lease, or partnership modes of financing. The murābaḥah (cost-plus sale) and ijārah muntahiyah bi-t-tamlīk (lease-to-own) products achieve similar end-results, where both products are used as Islamic financial mechanisms for Islamic banks to achieve profits on financed assets, and where the client benefits from the financed asset—leading the client to ultimately own the asset at the end of the financing tenor without limitations (whether releasing the asset as a collateral for a murābaḥah or transferring the title deed to the client at the end of an ‘ijārah muntahiyah bi-t-tamlīk’ contract). Using a qualitative methodology, this article investigates how Islamic banks choose between using murābaḥah or ijārah muntahiyah bi-t-tamlīk when financing a customer. This article includes empirical work by analysing primary and secondary data pertaining to three Islamic banks in the Kingdom of Bahrain.

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