DEFINITION of Musawamah
Musawamah is an Islamic finance term that describes a sale in which the seller is not obligated to disclose to a buyer the price paid by the seller to create or obtain the good or service. There are rules regarding the good or service that must be met in order for Musawamah to be used as a method of negotiation. The rules must be satisfied in order for the transaction to be Shariah compliant. Banking or other transactions undertaken under Islamic rules must be Shari'ah compliant.
BREAKING DOWN Musawamah
Musawamah describes a transaction where the price acquisition price of an underlying good or service is not disclosed to the buyer. This differs from murabaha, where a buyer knows the cost of the underlying asset. Since the seller is not obligated to disclose the cost of obtaining or producing the merchandise for sale to the buyer, the agreed selling price is left to the bargaining powers of both the seller and buyer. In order to comply with Shari'ah, there are many restrictions to a musawamah, including:
- The underlying asset must be in existence and in the sellers' possession at the time of the sale.
- The sale must occur instantaneously, future sale dates are void.
- The asset must be of value and usable.