Murabaha differs from interest-based lending as it is based on economic activity, an influential sharia scholar said on Thursday, countering criticism that sharia banking is a copy of conventional finance.

Murabaha, or cost-plus financing, is widely used to finance the purchase of assets from real estate to machinery but has been compared to conventional loans due to the profit earned by banks.

Under a murabaha deal, an Islamic bank buys an asset from a third party and sells it to its customer at cost plus profit.
This allows the bank to extend financing without charging interest, which is forbidden by the sharia.

Qatari sharia scholar Ali Muhyiddin Al-Qura Daghi drew a distinction between the two financing arrangements.

"The issue is the structure of these instruments and contracts and who bears responsibility," Daghi said in an interview on the sidelines of a sharia advisers meeting in the Malaysian capital.

"The interest in interest-bearing loans is something that is guaranteed to the lender and he undertakes absolutely no risk at all. In murabaha, the bank undertakes responsibility if the commodity should be damaged or destroyed during the period."    

Since the oil price boom and recent financial crisis, more countries are exploring Islamic banking. But there is also scepticism about the system, with critics dismissing it as conventional banking cloaked in religious language.

They point to the use of the conventional London Interbank Offered Rate for pricing Islamic products and sharia banks' preference for a predetermined return instead of sharing profits and losses.

The quest to grow market share and the industry's struggle to keep up with a boom in demand are cited as some reasons why Islamic finance has replicated traditional banking practices.

"There is a genuine fear among Islamic circles that if interest is largely substituted by 'mark-up' under the profit and loss sharing operations, it would represent a change just in name rather than in substance," the Council of Islamic Ideology has said.

"Profit and loss sharing under the mark-up system was in fact the perpetuation of the old system of interest under a new name."    

But Daghi said cost-plus financing cannot be equated with conventional lending. "From an economic aspect, murabaha is linked to the real economy whereas the interest-based lending system is a step removed from that," said Daghi, who advises leading industry body Accounting and Auditing Organisation for Islamic Financial Institutions.

"It's money begetting money. Money doesn't beget money by itself, there has to be that intermediate step." - Reuters