Musawamah
What Is Musawamah?
Musawamah is a term utilized in Islamic finance. It depicts a type of transaction wherein the buyer doesn't have the foggiest idea about the price paid by the seller to make or get the great or service being offered.
Under the rules of Islamic finance, different conditions must be met for Musawamah transactions to be permitted and to satisfy the guidelines required under Sharia law.
How Musawamah Works
Musawamah portrays a transaction where the price of the great or service isn't revealed to the buyer. This varies from murabaha transactions, where a buyer knows the cost of the underlying asset. Since the seller isn't committed to reveal the cost of acquiring or creating the merchandise available to be purchased to the buyer, the agreed selling price is passed on to the bargaining powers of both the seller and buyer.
To consent to Shariah law, a musawamah transaction must keep different conditions. For example, musawah transactions must be spot transactions as in the exchange must occur immediately; futures contracts consequently don't qualify. Essentially, the great or service being referred to must be of unmistakable economic value, like a consumable product. Musawamah transactions must likewise be limited to goods or services that existed at the hour of sale, implying that they can't be utilized to obtain goods that poor person yet been manufactured or acquired.
In practice, there is substantial variation in the ways in which the rules of [Sharia-consistent finance](/shariah-agreeable funds) are deciphered and applied all through the Islamic world. Notwithstanding, common rules in Islamic finance remember the denial of usury and of investments for banished business practices like the production of weapons, cigarettes, or pork.
To explore these intricacies, financial firms all through the world have sent off investment funds and other financial products intended to give Sharia-consistent options to Muslim investors. These products are frequently managed in a way like the Socially Responsible Investment (SRI) products that have become well known in recent years. Specifically, Sharia-consistent investments are regularly supervised by a special board of specialists in Sharia law, who exhort the investment managers on whether specific investments are suitable up-and-comers.
Real World Example of a Musawamah Transaction
Michaela wishes to purchase a trinket from a merchant during her movements in Morocco. She chooses a privately made scarf which is being sold by a craftsman in a small market.
Since the scarf has clear convenience and value to the buyer, and in light of the fact that it is as of now in the possession of the seller and is being sold right now, the sale of the scarf qualifies as a Musawamah transaction under Sharia law. Hence, the merchant isn't committed to reveal to Michaela the underlying cost of creating the scarf. Consequently, Michaela won't have a clue about the seller's profit margin while haggling over the price.
Thus, Michaela and the merchant are free to barter over the price of the scarf until they arrive at a mutually acceptable agreement.
Features
- In the financial services sector, different administrative and technical innovations have happened to oblige the strict requirements of Muslim investors.
- Musawamah transactions are those wherein the buyer and seller are permitted to barter over the price, without the seller uncovering the production cost of the product.
- These transactions are regulated under Islamic law; specific conditions must be met for a specific transaction to qualify.
