Unit 1(murabaha)

Murabaha

1. Murabaha

2. Definition Murabaha: It is a form of sale where goods has been sold on definite contract price with complete discloser of cost and profit to the buyer. Murabaha sale may be spot or deffered .

3. Murabaha in Islamic Banking 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. Murabaha in Islamic Banking is that Bank purchases or authorizes the customer to purchases goods on bank’s behalf upon request of customer and his promise to buy that goods from Bank and then Bank sells these goods to customer on Murabaha basis. It is called Murabaha to the purchase orderer .

4. Murabaha in Islamic Banking Features of Murabaha in Islamic Banking: This transaction is concluded with a prior promise to buy, submitted by a person interested in acquiring goods through the institution. It is a bunch of contracts completed in steps and ultimately suffices the financial needs of the client. The sequence of execution of contracts is extremely important to make the transaction Shariah compliant.

5. Scope of Murabaha A general misconception is that Murabaha can be used for financing all type of assets. As it is a kind of sale, there must be a seller and buyer and some thing that is bought and sold . The institution is the seller and the client is the buyer. It is a fixed price sale and normally used for short term financing. It cannot be used as a substitute for running finance facility, which provides cash for fulfilling various needs of the client.

6. Conditions for Shariah Compliant Transaction Murabaha transaction can not be done in goods that are not permissible in Shariah. Both Sale must fulfill all Shariah Rulings regarding the sale contract. Goods must not be consumed before offer and acceptance of 2 nd sale. Goods must be transferred from Seller to Bank’s Possession before 2 nd sale. Original seller and customer must be different parties and do not have ownership relationship. Bank must disclose the cost to the customer and certain amount of profit included into selling price. A contract must not have condition to the next contract.

7. Process Description of Murabaha Financing Client approaches the bank for facility through Murabaha (FAL). Client and bank sign an agreement to enter into Murabaha (MMFA). Client appointed as agent to purchase goods on bank’s behalf (When Needed). Bank gives money to agent/supplier for purchase of goods or may make direct payment to vendor (Direct / Indirect payment). The agent takes possession of goods on bank’s behalf. Agent makes a confirmation to the bank through a declaration that it has purchased the specified goods and has not consumed / resold it.

8. Process Description of Murabaha Financing Client makes an offer to purchase the goods from bank through a Murabaha Contract and Bank accepts the offer and sale is concluded. Client pays agreed price to bank according to an agreed schedule (Payment Schedule). Usually on a deferred payment basis (Bai Muajjal ).

9. Process Description of Murabaha Financing Client approaches the bank for facility through Murabaha (FAL). Bank Client Facility Approved

10. Process Description of Murabaha Financing Client and bank sign an agreement to enter into Murabaha (MMFA). Master Agreement to Murabaha Bank Client

11. Process Description of Murabaha Financing Client appointed as agent to purchase goods on bank’s behalf (When Needed). Agency Agreement Agreement to Murabaha Bank Client

12. 3. Bank gives money to agent/supplier for purchase of goods or may make direct payment to vendor (Direct / Indirect payment). Disbursement to the agent or supplier Agency Agreement Supplier Agreement to Murabaha Bank Client Process Description of Murabaha Financing

13. Process Description of Murabaha Financing 4. The agent takes possession of goods on bank’s behalf. Transfer of Risk Delivery of goods Vendor Bank Agent

14. Process Description of Murabaha Financing 5 (a). Agent makes a confirmation to the bank through a declaration that it has purchased the specified goods and has not consumed / resold it. Declaration Bank Agent

15. Process Description of Murabaha Financing 5(b). Client makes an offer to purchase the goods from bank through a Murabaha Contract and Bank accepts the offer and sale is concluded. Murabaha Contract + Transfer of Title Bank Client

16. Process Description of Murabaha Financing 6. Client pays agreed price to bank according to an agreed schedule (Payment Schedule). Usually on a deferred payment basis ( Bai Muajjal ). Payment of Price Bank Client

17. Process Flow for Murabaha Each Murabaha Transaction must be executed through following stages: Promise Stage Agency Stage Acquiring Possession Execution of Murabaha After Execution of Murabaha

18. Process Flow for Murabaha 1. Promise Stage Credit Approval Check that the transaction between two parties must be genuine , not fictitious. The Institution must insure that the party from whom the item is bought is a third party and not the customer or his agent.

19. Process Flow for Murabaha Shariah Process Flow Shall be prepared by Business Shall describe complete process of transaction nature of assets (assets should be in line with financing approval). Method of payment ( i.E. In bullet or trenches/through DD/PO/RTGS or in client account) Financing terms if any Main suppliers in market Size of purchases

20. Process Flow for Murabaha SPF shall also describe: Normal consumption time and Goods verification requirements at the time of declaration. The process flow will also give details of any supplier which is a related party. Business will get the approval of Shariah department and will send to CAD and COD. Murabaha Facility Agreement to be signed by both Parties. It includes: Mentioning Limits of each facility Security to be submitted by the Customer Other terms and conditions covering all the facilities approved for the Customer.

21. Process Flow for Murabaha Purchase Requisition The Client orders the institution to buy certain goods for him and sell him the same after acquiring. Containing the details of the goods required to purchase from the Supplier, Cost Price and expected date of delivery The prerequisite is that the goods are not already owned by the client. Promise to Purchase At this stage the customer promises the institution to buy the goods which were acquired by the institute on his request.

22. Process Flow for Murabaha Agency Stage Agency Agreement is not the condition of the Murabaha if the institution can make direct purchases from the supplier. The financial institution, does not have the expertise to identify the goods and negotiate an efficient price. The institution therefore appoints customer as its Agent (which is also permissible), in the first step of the transaction, to identify and procure the goods on institution behalf. This is done by execution of Agency Agreement between the institution and the customer. However according to Sharia Perspective it is preferable to appoint the Agent other then customer.

23. Process Flow for Murabaha Payment for Murabaha Goods by Bank In principle payments for the procurement of goods for onward Murabaha sale to the customer will be made directly to the supplier. However in certain circumstances it becomes impossible or difficult to make direct payment. In all such cases with valid justification and with the approval of RSBM, indirect payment for Murabaha may be allowed .

24. Process Flow for Murabaha Acquiring Possession Institution must take actual or constructive possession of the item. The forms of taking delivery or possession of items differ according to their nature and customs. The item must move from the responsibility of the supplier to the responsibility of the institution . It is obligatory that the point when the risk of the item is passed on by the institution to the customer, be clearly identified. It is advisable that bank should appoint one person for physical inspection.

25. Process Flow for Murabaha Execution of Murabaha Goods must exists at the time of execution of Murabaha. The Customer will make an offer to purchase the goods acquired by him for Bank’s behalf mentioning the Offer Price. (Comprising Cost plus Bank’s Profit ) The Bank will accept the offer made by the Customer. All the terms of the Murabaha Transaction such as Sale Price ( Cost plus Profit ) Due Date or Schedule of Payments etc. must be mentioned in the Bank’s Letter of Acceptance. At this stage relation of a Buyer & Seller comes into operation between the institution & the client. Since the sale is effected on deferred payment basis, the relation of Debtor and Creditor also emerges between them simultaneously.

26. Process Flow for Murabaha After Execution of Murabaha: Customer will pay the price as per schedule of payment.

27. Practical Issues in Murabaha

28. Practical Issues in Murabaha Rebate on Early Payment If the customer makes early payment, the institution has the sole discretion in allowing them the rebate. Such rebate should not be the condition for early payment. It is not recommended to make it a practice and must be avoided in normal course of business. Such issue, if arises, should be brought in the knowledge of Shariah advisor

29. Practical Issues in Murabaha Penalty on Late Payment As soon as the Murabaha is executed, the Murabaha price becomes a receivable ( Dayn ) for the Bank. Hence, any amount charged over and above the “ dayn ” amount will be Riba . However, it is permissible to have an undertaking from the customer to pay an amount of money or a percentage of the debt to be donated to charitable causes in the event of delay in payment/installments .

30. Practical Issues in Murabaha Buy Back in case of Group Companies Bank is purchasing the goods from one company and selling to the other company but since the ownership is common so it is deemed as a buy back transaction; where goods are purchased from one person for the purpose of selling it back to the same at a different price.

31. Practical Issues in Murabaha Profit Recognition Generally in Murabaha transaction there are two stages: Investment Stage (Agency to Purchase) Financing Stage (Declaration/ Murabaha Contract to payment) The profit for the Murabaha transaction can be recognized after the goods are sold by the bank to the customer.

32. Practical Issues in Murabaha Rollover in Murabaha Murabaha Transaction must be executed on a particular asset. Two Murabaha Facility can not be obtained on same asset and at the same time. Process of Murabaha differ from product to product Application of Murabaha is not simple for all products. Its application differs from products to products like Sugar cane, Shares, Leather, Cotton, Gas, Petrol.

33. Jazak Allah o Khair