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MURABAHA
FINANCE

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 LEARNING OBJECTIVES

•Conceptual understanding of Murabaha

•Stages involved in Murabaha Transaction
•Practical issues in Murabaha and their
resolution
•Murabaha Documentation
•Uses of Murabaha as Mode of Finance
(Local as well as import Murabaha)

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 DERIVATION OF MURABAHA

•The word “Murabaha” has been derived

from the Arabic word “Ribah”, which
has literary meaning of profit.

•The Murabaha can be denoted as “Sale

With Profit”.

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 DEFINITION OF MURABAHA
 

Murabaha is a particular kind of sale

where Seller expressly mentions the
cost it has incurred on purchase of the
Asset(s) to be sold and sells it to
another person by adding some profit,
which is known to Buyer.

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 WHAT IS SALE?

Sale is defined in the Islamic Fiqh as

follows:
“Exchange of a thing(subject matter)
of value with another thing of value,
with mutual consent”.

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 COMPONENTS OF VALID SALE

SALE

CONTRACT SUBJECT PRICE POSSESSION

MATTER

•Offer/Acceptance •Existence •Quantified •Physical

•Buyer/Seller •Ownership •Certain •Constructive
•Possession
•Valuable
•Specific
•Halal Purpose  Instant and absolute
•Delivery  Unconditional
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 The phenomenon of cheating:
Cheating in buying and selling
How often this happens nowadays in the marketplaces of the Muslims! It may take
the form of concealing faults in goods or other ways such as deceiving people about
the quality of a product, or its components, quantity, weight, essential features or
source.
•These are some of the ways in which that cheating is manifested:
•1-Some fruit-sellers put a lot of leaves or papers in the bottom of the basket of
fruit, then they put the best fruit at the top. In this manner they deceive the
purchaser and cheat him by making him think that the basket is full from top to
bottom, and that all the fruit is of the same quality as that which he sees on the top.
•2-Some of them get food oil and mix it with perfume, with the larger proportion
being of oil. Then they put it in glass bottles, and this substance smells like perfume,
and they sell it for a low price.
•3-Some traders buy a product in a very light wrapper, then they put it in a much
thicker wrapper, maybe five times thicker. Then they sell the wrapper and its
contents, weighing the whole lot and charging for both the wrapper and the
contents.

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• 4-Some traders do some light mending on clothes, then they sell
them without explaining that they have been mended, rather they
swear by Allah that they are new – may they perish!
• 5-Some of them may wear a garment until it loses its value, then
they shorten it and put some starch in it, to make people think that
it is new, and they sell it as if it is new.
• 6-Some perfume-sellers put some products, such as saffron, near
water so that they may absorb the moisture, thus increasing the
weight by approximately one-third.
• 7-Some vendors and shopkeepers make their stores very dark by
using coloured lights, so that rough products will look smooth and
ugly ones will look beautiful. The Shaytaan makes their evil deeds
attractive to them.
• 8-Some goldsmiths mix gold with copper and the like, then they sell
it as if it is pure gold.
• 9-Some of them buy clean second-hand gold, then they offer it for
sale at the price of new without telling the purchaser that it is
second-hand.

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• 10-Some vendors at car auctions put thick oil in the car engine so
that the purchaser will think that it is in good condition.
• 11-Some of them turn back the odometer, if it shows that the car
has traveled a great distance, to trick the purchaser into thinking
that the car has only been used a little.
• 12-Some of them, if they have a car that they want to sell and they
know that it has a hidden fault, will say to the one who wants to
buy it, “Try this car if you want to buy it,” without telling him
anything about it. By Allah, this is cheating and deceit.
• 13-Some of them describe many faults in the car which are not real,
with the intention of concealing the real faults of the vehicle
behind these imaginary faults.
• Even worse than that is when they do not mention the faults until
after the sale has been made and the deposit paid, and the
purchaser is not able to inspect the car and is not allowed to do so.

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• 14-Some of them, if they have a car that they want to sell,
will praise it and swear by Allaah that it is good, and they
will fabricate reasons why they want to sell it, but Allaah
knows all secrets and that which is yet more hidden.
• 15-Some of them agree with their friends to increase the
price so that someone else will take it. This is the najsh
(artificial inflation of prices) which the Messenger of Allaah
SAWS (peace and blessings of Allaah be upon him) forbade.
• 16-Another kind of cheating in selling is when butchers
inflate the animal carcass that they want to sell so that the
purchaser will think that it is all meat.
• 17-Some vendors at sheep auctions and places where
chickens are sold feed the animals salt [to make them drink
more and thus look fatter], so that the purchaser will think
that they are fat when they are not.

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FEATURES OF MURABAHA

•Murabaha finance is not a loan given

on interest, it is a sale of Asset(s) for
cash/deferred price.

•It is the obligation of the Seller to

disclose the Cost and Profit to the
Buyer.
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 FEATURES OF MURABAHA

•Murabaha Finance can only be used for

the purchase of fresh Asset(s) only.

•Buy-Back arrangement is prohibited.

This means that Murabaha transaction
cannot be executed for the Asset(s)
already purchased by the Customer.

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FEATURES OF MURABAHA

•Murabaha Transaction can either be a

cash sale (Spot Payment Murabaha)
or a credit sale (Deferred Payment
Murabaha) or a combination of both.

•Payment of Murabaha Price can be

made in lump sum or in installments
or combination of both.

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 FEATURES OF MURABAHA

•It is a fixed price sale and normally is

done for short term.

•The Murabaha Finance can be used to

meet the working capital
requirements. However, it cannot be
used to meet the liquidity
requirements.
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 VARIOUS
MODELS OF
MURABAHA
FINANCE
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MODEL - I
TWO PARTY REALTIONSHIP
• Bank – Customer

MODEL - II
THREE PARTY RELATIONSHIP
• (Bank-Vendor) and Customer

MODEL - III
THREE PARTY RELATIONSHIP
• Bank and (Vendor-Customer)

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 MODEL - I
•The simplest possible Model emerges
when the transaction involves two parties
only, i.e Bank and the Customer.
•The Bank is also vendor and sells the
Asset(s) to its Customers on deferred
payment basis.
•From Shari’ah perspective it is an ideal
Model and its profits are fully justified
because Bank assumes all risks as
Vendor/Trader.
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MODEL I – GRAPHICAL PRESENTATION

Customer Bank/Vendor
3

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 MODEL I - PHASES
Phase 1:
The customer approaches Bank (Vendor) and
identifies Asset(s) and collects relevant information
including cost and profit.
Phase 2:
Bank sells Asset(s) to the Customer, transfer risk
and ownership to the Customer at certain
Murabaha Price.
Phase 3:
Customer pays Murabaha Price in lump sum or in
installments on agreed dates.

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 MODEL - II
•In most cases Murabaha Transaction
involves a third party (i.e. Vendor)
because Bank is not expected to engage
in sale of variety of products required
for variety of Customers.

•The Bank directly deals with the

Vendor and purchases the Asset(s).
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 MODEL II
•The Bank sells the purchased
Asset(s) to the customer on cost
plus basis.

•There are two distinct sale contracts

at different point of times. First
between Bank and Vendor and
second between Bank and the
Customer.
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MODEL II – GRAPHICAL PRESENTATION

1 3
4
Vendor
5
2
6
Customer Bank
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 MODEL II - PHASES
Phase 1:
Customer identifies and approaches the Vendor or Supplier of the Asset(s)
and collects all relevant information.

Phase 2:
Customer approaches the Bank for Murabaha Financing and promises to
buy the Asset(s).

Phase 3:
The Bank makes payment to vendor directly.

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 MODEL II – PHASES
Phase 4:
Vendor delivers the Asset(s) & transfers the ownership of Asset(s) to the
Bank.

Phase 5:
Bank sells the Asset(s) to Customer on cost plus basis and transfers
ownership.

Phase 6:
Customer pays Murabaha Price in lump sum
or in installments on agreed dates.

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MODEL III – BANKING MURABAHA

• This Murabaha Model is mostly practiced model in Banking now a

days and therefore we will look at it in more detail.
We will also look at the documentation required at different stages
of the transaction.

• It is also a three-party structure but it is bit complicated than

previous ones.

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 MODEL III – BANKING MURABAHA

•The product of Murabaha that is being

used in Islamic Banking as a mode of
finance is something different from the
Murabaha used in normal trade .

•It is called Murabaha to the Purchase

Orderer .

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 MODEL III – BANKING MURABAHA

•It is a bunch of contracts completed in steps

and ultimately suffices the financial needs
of the client.
• THE SEQUENCE OF THEIR EXECUTION IS EXTREMELY
IMPORTANT TO MAKE THE TRANSACTION SHARIA’H
COMPLIANT .

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 MODEL III – GRAPHICAL PRESENTAION

3
4
Vendor 5

6
Customer Offer Acceptance Bank
1
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 PHASE I – PROMISE TO PURCHASE AND SELL

• The Customer approaches the Bank for

Murabaha Finance and promises to
purchase the Asset(s) from the Bank
which, the Customer will purchase as an
Agent of the Bank.
• Master Murabaha Finance Agreement
(MMFA) shall be signed by the Bank and
the Customer at this stage. This is
basically a Memorandum of
Understanding between two parties.
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 PHASE II – APPOINTMENT OF AGENT
• In the absence of expertise required to purchase particular kind of
Asset(s), the Bank appoints Customer as its Agent to buy Asset(s) on
its behalf

• Types of Agency Agreement

ON ASSET BASIS ON TIME BASIS

•Global Agency •Limited Period

•Specific Agency •Open Ended

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 PHASE II – APPOINTMENT OF AGENT
•The appointment of an Agent for
purchase of Asset(s) for and on behalf
of the Bank and the ultimate sale of
such Asset(s) to the Customer shall be
independent transactions of each other
and separately documented.

•However, according to Sharia’h

perspective, it is preferable to appoint
the Agent other than the Customer.
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PHASE II – APPOINTMENT OF AGENT
•Agency Agreement is not the condition
of the Murabaha if the institution can
make direct purchases from the
supplier.

•It is advisable to execute Agency

Agreement because financial institution
does not have the expertise to identify
the Asset(s) and negotiate an efficient
price.
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 PHASE II – DOCUMENTATION
AGENCY AGREEMENT

• This agreement must contain:

 Types (Global/Specific)
 Description of Asset(s) to be purchased
 Mode of Disbursement of Funds
 Roles and Responsibilities of Agent

• THIS DOCUMENTS MUST BE SIGNED BEFORE PURCAHSE OF

ASSET(S) BY THE AGENT

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 PHASE III & IV –
PURCHAHSE OF ASSETS BY AGENT
•The Customer identifies the Vendor,
selects the Asset(s) on behalf of the Bank
and advice its particulars, including the
Vendor’s name and purchase price to the
Bank.

•If the supplier is nominated by the

Customer itself, guarantee for good
performance can be demanded from the
Customer.
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 PHASE III & IV –
PURCHAHSE OF ASSETS BY AGENT

•The Customer takes possession of the

Asset(s) as an Agent of the Bank.
•It is the obligation of the Customer(Agent) to
ensure, at this stage, that Asset(s) supplied is
in accordance with the given specifications.
•To ensure that a fresh Asset(s) are purchased
by the Agent, Bank’s staff should verify
actual purchase of Asset(s).
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 PHASE III & IV–DOCUMENTATION
DECLARATION FROM CUSTOMER (AGENT)

• The Customer (Agent) will inform the Bank, through

this document, that it has taken the possession of
Asset(s) on behalf of the Bank.

• This Transactional Document shall be an integral part

of Master Murabaha Financing Agreement (MMFA).

• This declaration must contain the statement that

Customer has inspected the Asset(s) to ensure that its
appropriateness and suitability to the customer.
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 Phase V
DISBURSEMENT OF FUNDS / PAYMENT TO VENDOR

• The Bank has two options regarding for

payment of Purchase Price of Asset(s)
bought by Agent on its behalf.
a) Direct payment to Vendor by the Bank (preferable).
b) Disbursement of Funds to Agent’s (Customer’s) account for onward
payment to Vendor through Cross Cheque/Pay Order/Demand Draft
etc.

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 PHASE V - DOCUMENTATION

LETTER OF DISBURSEMENT

• This documents is request from Customer to disburse funds for

payment to Vendor.

• The disbursement of funds to the Customer shall be treated as

“Advance Against Murabaha”.

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 PHASE VI
MURABAHA EXECUTION STAGE (OFFER
AND ACCEPTANCE)
• The Customer offers to buy the Asset(s) from the Bank which it has
purchased as an Agent of the Bank.

• The Bank gives the Acceptance to the Customer’s Offer.

• THIS IS THE POINT WHERE THE MURABAHA COMES IN TO EXISTENCE.

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 PHASE VI
MURABAHA EXECUTION STAGE (OFFER
AND ACCEPTANCE)
• It is obligatory that the point when the risk of the
Asset(s) is passed on by the Bank to the customer
be clearly identified.

• It is mandatory to determine the Murabaha Price

at this stage, otherwise Murabaha shall not be
valid.

• It is also mandatory to determine the date of

payment of Murabaha Price rendering the
Murabaha to be valid.
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 PHASE VI
MURABAHA EXECUTION STAGE
DOCUMENTATION

a) OFFER FOR PURCHASE

• The Customer offers to buy the Asset(s) purchased by it as an
Agent.
• This documents should be signed after actual possession of Asset(s)
by the Customer but before consumption of such Asset(s).
• This Transactional Document shall be an integral part of Master
Murabaha Financing Agreement (MMFA).

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 PHASE VI
MURABAHA EXECUTION STAGE
DOCUMENTATION

b) BANK’S ACCEPTANCE OF OFFER

• Bank accepts the Customer’s offer and sells the Asset(s)

purchased by Customer(Agent) on its behalf on Murabaha Price
to be paid on agreed future date.
• The Asset(s) must be in Bank’s possession by either way, i.e.
physical or constructive.

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 PHASE VI
MURABAHA EXECUTION STAGE
DOCUMENTATION
• This document must contain

i. Murabaha Price (Cost+Profit)

ii. Repayment Date

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 PHASE VI
MURABAHA EXECUTION STAGE
DOCUMENTATION

c) PAYMENT SHEDULE SUMMARY

• The customer has three options to pay the

Murabaha Price.
i. Lump-sum payment
ii. Installment Payment
iii. Partly instant and partly in installment

• This documents is required if the Customer

wishes to pay the Murabaha Price in
installments
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 PHASE VI
MURABAHA EXECUTION STAGE
DOCUMENTATION

d. DEMAND PROMISSORY NOTE

• After execution of Murabaha, the Murabaha Price will become

the Debt (Dyan) on the Customer.
• This document is Customer’s acknowledgement to the debt
amount and its promise to pay the debt.

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 PHASE VII
PAYMENT OF MURABAHA PRICE BY
CUSTOMER
• Customer will pay the Murabaha Price to the Bank on the agreed date.

• The customer is not entitled to any reduction in Murabaha price in case

of early payment of Murabaha Price.

• In same way Bank can not increase the Murabaha Price if the Customer
defaults or make delayed payment.

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 SECURITIES IN MURABAHA

• The institution may ask the customer to furnish a security to its

satisfaction for prompt payment of the Deferred Murabaha price.

• It is also permissible that the sold Asset(s) itself is given to the seller as a
security.

• It is preferable not to take Interest bearing instruments as securities.

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SECURITIES IN MURABAHA
• Bank can obtain any of the following security from its Customer client
depending upon the nature of credit facility, amount of facility and
credibility of the customer.

 HYPOTHECATION OF ASSETS
 PLEDGE OF GOODS AND/OR MARKETABLE SECURITIES.
 LIEN ON DEPOSITS.
 MORTGAGE ON IMMOVABLE PROPERTIES.
 BANK GUARANTEES.
 PERSONEL GUARANTEES.

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MURABAHA IN FOREIGN TRADE
Murabaha

Import Export
Murabaha Murabaha

Pre-shipment Post-shipment

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 USE OF MURABAHA IN IMPORTS
• Agency Agreement must be signed before opening of L/C in case of
imports.
• All costs/charges (e.g SWIFT charges, L/C Opening commission) shall be
included in the cost of Murabaha Asset.
• Offer and Acceptance may be signed when the Asset(s) arrived at port.
• In case of Usance L/C, Murabaha execution stage is “offer and
Acceptance stage” even though the payment is made after usance
period.

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 USE OF MURABAHA IN EXPORTS

• In case of Pre-shipment, normal procedure as adopted in local

Murabaha shall be strictly followed.

• In case of post-shipment, Murabaha can not be executed for goods

already exported. However, Murabaha can be executed for fresh
purchases required for next shipment against assignment of receivables
for first shipment.

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