Key Islamic banking contract under fire

By Mohammed Abbas

MANAMA (Reuters) - The Islamic finance industry is seeking alternatives to a key contract -- commodity murabaha -- as scholars and bankers grow more vocal in their concerns the deal that once powered the industry is increasingly unsuitable.

Commodity murabaha involves a bank buying a commodity for a client, and the client paying the bank back the cost of the commodity plus a bank charge or "profit rate" at a later date.

Islam bans interest, and stipulates that deals must be based on tangible assets -- money cannot be made from money alone.

However, in a form of commodity murabaha known as tawarruq, the contract can also be used to secure cash when the client sells the commodity on again, effectively buying money from the bank for the cost of the profit rate.

"Tawarruq ... is one of the most critical internal and ideological challenges the Islamic banking industry is facing," top Islamic scholar Hussain Hassan said in a private report seen by Reuters.

"Tawarruq...contradicts the fundamental purpose of Islamic banks," he continued. Hassan sits on the Islamic law, or sharia, boards of several Islamic financial institutions, including Dubai Islamic Bank and Deutsche Bank.

"The fear is that sometimes the commodity doesn't exist and the broker could be cheating," Osaid Kailani, head of Abu Dhabi Islamic Bank's sharia division said, referring to Islam's ban on interest requirement that deals are based on tangible assets.

"The broker may also sell the same commodity to more than one bank at the same time. This has been discovered in some cases, but there are brokers committed to sharia law," he added.  Continued...