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Rehmanwaheed 3180 17836 2 13. Murabaha
Rehmanwaheed 3180 17836 2 13. Murabaha
MURABAHA
Rehan Waheed
Murabaha Outline of the Presentation
▪ Murabaha – Defined
▪ Difference b/w Murabaha & Sale
▪ Difference b/w Conventional Financing & Murabaha
▪ Basics Rules of Murabaha
▪ Step by Step Murabaha Financing
▪ Issues in Murabaha
▪ Risk Management in Murabaha Financing
▪ Variants of Murabaha Financing
▪ Bai Muajjal
▪ Uses of Murabaha
▪ Conditions of Bai Muajjal
▪ Accounting Treatment of Murabaha Transactions
Murabaha Mudarabah - Defined
Murabaha
▪ Murabaha is a sale where seller expressly mentions cost of the sold commodity and sells it to the
buyer by adding certain profit thereon
▪ Thus, Murabaha is not a loan given on interest; rather it is a sale of a commodity
▪ The distinguishing feature of Murabaha from ordinary sale is that:
▪ Seller discloses cost to the buyer
▪ Adds a known/disclosed profit
▪ Payment of Murabaha price may be
▪ At spot / In installments / Deferred i.e. lump sum after a certain time
▪ Hence, Murabaha does not necessarily imply the concept of deferred payment
Murabaha Banking Murabaha
▪ It is a contract wherein the Bank, upon request by a customer, purchases an asset from the third
party (supplier) and resells the same to the customer either against immediate payment or on a
deferred payment basis
▪ It is a bunch of contracts completed in sequential steps and ultimately suffices the financial needs
of the client
▪ The sequence of their execution is extremely important to make the transaction Shariah compliant
▪ A simple sale in Arabic is called ‘Musawammah’ i.e. a bargain or regular sale without disclosing
the cost
Murabaha Conventional Financings vs Murabaha
1. The Client and Bank sign an overall agreement whereby Bank promises to sell the commodity
and the client promises to buy it from time to time
The set of agreement is known as Master Murabaha Facility Agreement (MMFA)
Bank Client
Agreement of Murabaha
Murabaha Step by Step Murabaha Financing
2. An Agency Agreement is signed by both the parties whereby Bank appoints the client as his
agent to purchase goods on Bank’s behalf
Bank Client
Agency Agreement
Murabaha Step by Step Murabaha Financing
3. Upon submission of Order Form, bank gives money to agent / supplier for purchase of goods.
The client purchases the goods on behalf of the Bank and takes possession of the goods as
Bank’s agent
Agency Agreement
Supplier
Murabaha Step by Step Murabaha Financing
4. The client informs the Bank that it has purchased the commodity on behalf of the Bank.
The agent takes possession of goods on Bank’s behalf and informs the Bank through a Goods
Declaration form
Bank Agent
Murabaha Step by Step Murabaha Financing
5a. Client makes an offer to purchase the goods from Bank through a Murabaha Contract
Bank Client
Offer to purchase
Murabaha Step by Step Murabaha Financing
5b. Bank accepts the offer and sale is concluded. Ownership and risk is transferred to the client
Murabaha Contract
+
Transfer of Title and Risk
Bank Client
Murabaha Step by Step Murabaha Financing
Payment of Price
Bank Client
Murabaha Stages of Murabaha
▪ Acquisition Stage Acquisition of title and possession of the asset by the Bank or its agent
Promise Stage
▪ It is permissible for the Bank to purchase goods only in response to its customer’s wish and
application and/or from a particular source of supply
▪ Customer may sign a ‘Promise to Buy’ the item from the Bank based on his wish and application
▪ Customer may obtain statement of prices from the supplier (offer of sale) addressed to the
Customer by name. It is preferable that invoice should be addressed to the Bank
▪ Murabaha transaction should exclude any prior contractual relationship between the customer
and original supplier
▪ It must be ensured that the party from whom the item is bought, is a third party, and not the
customer or his agent, so as to avoid Bai Inah (Buy Back)
Murabaha Promise Stage
▪ If the client nominates the supplier, guarantee for good performance of supplier can be demanded
from the customer in his personal capacity and not in his capacity as an agent of the Bank
▪ It is permissible for the Bank to take a sum of money (only in case of binding promise from the
customer) as ‘Hamish Jiddiyah’ (i.e. security deposit) from the customer as an indication of his
financial capacity or to ensure compensation of any damage arising from a breach of promise
▪ Security deposit can either be held as trust in the custody of Bank or it may be held as an
investment trust on the basis of Mudarabah
▪ In case of breach of promise Hamish Jiddiyyah can be used to recover actual damage. However, it
cannot be used for covering the Opportunity Cost
▪ The Bank is allowed to take ‘Urboon’ (earnest money). It is preferable to return to the customer that
remains from Urboon after deducting the actual damage incurred due to breach
Murabaha Acquisition Stage
Acquisition Stage
▪ It is prohibited for the Bank to sell any item in a Murabaha transaction before having acquisition of
the commodity either physical or constructive
▪ The contract between the Bank and supplier can be completed through exchanging the notices of
offer and acceptance, either in written form or correspondence by any form of modern
communication such as email
Murabaha Acquisition Stage
Appointment of Agent
▪ It is preferable that the Bank itself purchases the goods directly from the supplier. However, it is
permissible to authorize an agent (either the purchase orderor or some 3rd party) to carry out the
purchases. In case the customer is working as the agent of the Bank, he would not sell the goods to
him by himself
▪ When the customer is appointed as an agent to carry out the purchases, the Bank itself must pay
directly to the supplier and obtain from the supplier the documents that confirm the execution of
sale. It is obligatory to separate the two liabilities of risk attaching to the purchased goods, namely
the liability of the Bank and the liability of the customer as an agent of the Bank
Murabaha Acquisition Stage
▪ The contract of Murabaha is not automatically concluded by merely taking possession of the asset
by the Bank
▪ The Bank is entitled to receive compensation for any actual damage it has incurred as a result of
the customer’s breach of a binding promise
▪ The Bank has the obligation to disclose to the customer the credit given by the supplier and what
is added in the cost. The Bank can add any expense related to the item if the customer agrees or
add only the direct expenses which are normally included in the cost
▪ It is not permissible to add indirect costs, such as staff salary and the like, to the cost of the item
▪ If the Bank receives any discount from the supplier, the customer should benefit from that
discount by a reduction of the total Murabaha selling Price
▪ The cost and profit be fixed and known to both the parties on the signature of the contract of sale
Murabaha Execution Stage
▪ There is no objection to referring to any known benchmark (such as KIBOR) as a comfort indicator
to determine the rate of profit
▪ The selling price of the asset becomes a debt and it is not permitted subsequently to demand any
extra payment either in consideration of extra time given for payment or delay in payment
▪ It is permissible for the Bank to stipulate in the contract a condition that the Bank is free from
responsibility for all or some of the defects of the asset (Bai’-al-Bara’ah)
▪ It can be included in the contract that if the customer fails to pay on time, the Bank will have the
right to revoke the agreement and repossess the sold goods or the Bank can be given power from
the customer to sell the goods on behalf of the customer and settle the debt by the price received
and if some amount still remains, it would be recovered from the customer
Murabaha After Execution Stage
▪ The installments may become due before their originally agreed due dates in case of the
customer’s refusal to perform or delay in paying any installment without any good reason
Securities
▪ It is permissible to demand from the customer
▪ Third party guarantee / Lien on investment account or
▪ Pledge of any item of real or moveable property / Pledge of the subject matter of Murabaha
▪ It is permissible to require the customer to provide cheques or promissory notes before execution
of Murabaha as a guarantee of future indebtedness
▪ It is permissible to postpone the registration of the asset in the customer’s name as a guarantee
for full payment of the selling price
Murabaha Charity & Rebate
Charity Amount
▪ It is permissible to have an undertaking from the customer, as part of Murabaha contract, to pay
an amount of money or a percentage of the debt to be donated to a charitable causes in the event
of delay in payment/installments
Early Payment Rebate
▪ The Bank may give up part of the selling price if the customer pays early, provided this was not
part of the contractual agreement
▪ The payment of the debt due on account of Murabaha may be made in currency different from
that in which the debt is denominated, provided the exchange rate prevailing on the day of
settlement is taken
Murabaha Issues in Murabaha
Risk Mitigant
▪ Takaful cover may be obtained
▪ Reducing the time of ownership of goods by immediate sale after taking possession
Murabaha Risk Management in Murabaha
Credit Risk
▪ It is the risk pertaining to the default or delay of customer in paying its obligation
Risk Mitigant
▪ Any Shariah compliant security may be held to cover the risk
▪ Robust evaluation of customer’s business performance and industry look
▪ Matching the financing with cash cycle of the business
Murabaha Risk Management in Murabaha
Risk Mitigant
▪ Proper training of Bank employees and customers
▪ Development of easy to understand process flows for all Murabaha transactions
▪ Implementing strong control measures through effective policy making
▪ Implementing a system of Shariah audit and compliance
Murabaha Variants of Murabaha Financing