Banking Murabaha
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 .
• This transaction is concluded with a prior
promise to buy, submitted by a person
interested in acquiring goods through the
institution.
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BANKING MURABAHA
• It is called Murabaha to the purchase orderer .
• 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 Shariah
compliant.
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BANKING MURABAHA
It is a contract wherein the institution, upon
request by the customer, purchases a asset
from the third party usually a supplier/vendor
and resells the same to the customer either
against immediate payment or on a deferred
payment basis.
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SCOPE OF MURABAHA
• 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 buyer.
•It cannot be used as a substitute for running
finance facility , which provides cash for
fulfilling various needs of the client.
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SCOPE OF MURABAHA
•It is a fixed price sale and normally is done for
short term.
•The transaction can be used in order to meet
the working capital requirements however it
cannot be used to meet liquidity requirements.
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STAGES OF MURABAHA
1. Promise Stage
2. Agency Stage
3. Acquiring Possession
4. Execution of Murabaha
5. After Execution of Murabaha
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STAGES OF MURABAHA
PRIOMISE STAGE
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CREDIT APPROVAL (under
Shariah perspective)
Points to Be Considered While Approving Credit
•It is essential that the transaction between two
parties must be genuine , not fictitious and should
exclude any prior contractual relationship between
the customer and original supplier .
•It is not permissible to transfer a contract that has
been executed before between client and supplier.
However revocation of prior contract between the
supplier and the client can allow the institution to
enter in Murabaha
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CREDIT APPROVAL (under
Shariah perspective)
Points to Be Considered While Approving Credit
•The Institution must ensure that the party
from whom the item is bought is a third party
and not the customer or his agent . In this
manner the transaction can be saved from Bai
Inah (Buy Back) which is not allowed in sharia.
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Continues..
• The Client orders the institution to buy certain
goods for him and sell him the same after
acquiring. The prerequisite is that the goods are
not already owned by the client.
•At this stage the customer promises the
institution to buy the goods which were acquired
by the institute on his request.
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STAGES OF MURABAHA
2. AGENCY STAGE
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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 customer, however, being in the industry,
can do this.
• The institution therefore appoints him as its
Agent (which is also permissible), in the first step
of the transaction, to identify and procure the
goods on institution behalf.
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AGENCY STAGE
•This is done by execution of Agency Agreement
between the institution and the customer.
•However according to Shariah Perspective it is
preferable to appoint the Agent other than
customer.
•If goods are acquired from third party the
execution of agency agreement will be between
the institution & the third party.
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AGENCY STAGE
TYPES OF AGENCY AGREEMENT
1. GLOBAL AGENCY AGREEMENT
When the purchase of commodity is not of
consistent nature.
2. SPECIFIC AGENCY AGREEMENT
When the purchase of commodity is of
consistent nature.
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STAGES OF MURABAHA
3. ACQUIRING POSSESION
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ACQUIRING POSSESION
•Advance payment can be made to the supplier.
•DISCOUNT ON ACQUISITION OF ASSETS
Discounts from supplier (If any) would be
passed on to the customer at the time of
Murabaha Sale by reducing the cost of
sales.
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Continues..
•Change of commodity in the agency agreement
can be done with mutual consent.
•Delay in Supply from the Supplier.
Delay in Supply from the supplier in case where
specific time was allowed leads to the
revocation of agency agreement. In such cases
the customer will refund the cost of goods.
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Continues..
•Rejection On Ground Of Quality
•If the customer rejects the goods on ground of
inferior quality before the execution of Murabaha, new
quality can be acquired through new Murabaha.
After execution of Murabaha the bank will not be
liable for any discrepancies.
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Acquisition Of Title & Possession
The Asset
Of
•
Institution must take
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.
actual
or
constructive
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ACQUIRING POSSESION
Importance of Physical Inspection
Registration is in the name of institution for those
items where registration is required.
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STAGES OF MURABAHA
4. EXECUTION OF MURABAHA
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EXECUTION OF MURABAHA
• Customer, as an Agent, confirms that goods have
been purchased & same are in his possession and
that payment has been made to the supplier.
• Customer makes an offer to purchase the goods
from the institution.
• Institution accepts the offer by stating the Cost
price plus amount of Profit and the due date for
Payment by which sale is concluded.
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Continues..
• 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.
• Customer having received delivery of Goods as per
Purchase Requisition confirms that goods have been
examined and are satisfactory in respect of quality
and suitability for his use.
• The customer also releases the institution from any
risk / liability in respect of the goods in any manner.
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AFTER EXECUTION OF MURABAHA
Securities Against Murabaha Price
• The institution may ask the customer to furnish a
security to its satisfaction for prompt payment of the
deferred price.
• However, it is also permissible that the customer
furnishes a security at earlier stages but after the
Murabaha price is determined.
• It is also permissible that the sole commodity itself is
given to the seller as a security.
• It is preferable not to take Interest bearing
instruments as securities.
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AFTER EXECUTION OF MURABAHA
In Case Of Default:
• In the case of default by the buyer in the payment of price at
the due date, the price cannot be increased.
• However if he has undertaken, in the agreement to pay
certain amount for a charitable purpose, he shall be liable to
pay the amount undertaken by him.
• But this recovered amount from the buyer will not be
considered penalty nor compensation, therefore it will not
account to institutions income.
• Institution is bound to spend it for a charitable purpose on
behalf of the buyer.
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ISSUES IN MURABAHA
Rebate in Early Payment
•If the customer makes early payment and there is no
commitment from the institution in respect of any
discount in the price of Murabaha, than the
institution has the sole discretion in allowing them
the rebate.
Rollover in Murabaha
•Rescheduling is allowed but repricing is not allowed.
•Rollover is also not allowed.
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Murabaha
Step by step Murabaha
financing
1.
Client and bank sign an agreement to enter
into Murabaha.
Islamic
Bank
Agreement to
Murabaha
Client
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Murabaha
Step by step Murabaha financing
2.
Client appointed as agent to
purchase goods on bank’s behalf
Bank
Agreement to
Murabaha
Agency
Client
Agreement
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Murabaha
Step by step Murabaha financing
3.
Bank gives money to client for purchase of goods.
Islamic Bank
Bank
Agreement to
Murabaha
Client
Agency
Agreement
Disbursement to the client
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Murabaha
GENERAL MECHANICS
VENDOR
ISLAMIC BANK
Agreement
CUSTOMER
• The customer approaches the Bank with the request for
financing.
• The Bank purchases and receives title of ownership from the
vendor.
• The Bank makes payment to the vendor.
• The Bank transfers the title over to the customer upon
payment.
• The customer makes payment up-front or on a deferred basis
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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 Shariah 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
2
Customer
1
3
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Bank/Vendor
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 Profit
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
Customer
Vendor
5
2
6
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3
4
Bank
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:
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Customer pays Murabaha Price in lump sum
or in installments on agreed dates.
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
• 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
Vendor
4
5
5
2
Bank
Customer
6
Offer
Acceptance
1
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7
PHASE I – PROMISE TO PURCHASE AND SELL
•
•
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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.
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
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ON ASSET BASIS
ON TIME BASIS
•Global Agency
•Specific Agency
•Limited Period
•Open Ended
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
• THESE 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 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 document is requested from the
Customer to disburse funds for payment to
Vendor.
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• The disbursement of funds to the Customer
shall be treated as “Advance Against
Murabaha”.
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
•
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This documents is required if the Customer
wishes to pay the Murabaha Price in
installments
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.






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HYPOTHECATION OF ASSETS
PLEDGE OF GOODS AND/OR MARKETABLE SECURITIES.
LIEN ON DEPOSITS.
MORTGAGE ON IMMOVABLE PROPERTIES.
BANK GUARANTEES.
PERSONEL GUARANTEES.
MURABAHA IN FOREIGN TRADE
Murabaha
Import
Murabaha
Export
Murabaha
Pre-shipment
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Post-shipment
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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PRACTICAL
ISSUES
IN MURABAHA
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Discount On Acquisition Of Assets
• Discounts from supplier (If any)
would be passed on to the
customer at the time of Murabaha
Sale by reducing the cost of sales.
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Gap Between Declaration and Receipts
• In certain transactions banks receive declaration of
the purchased goods after significant delay. So there
is risk that goods might already have been used/sold
by the customer.
• Murabaha transaction should be executed as soon
the goods purchased by the customer.
• Gap between Disbursement and Declaration.
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D.P NOTE
• D.P Note Shall be signed from Customer After
Declaration.
• Amount of Declaration and Amount of D.P
Note shall be same.
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Risk Management
IN
MURABAHA
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Legal and Shari’a Risks
• Legal and Shari’a compliance risk
• Completeness of Legal documentation for
various contracts
• Adherence to AAOIFI Shari’s standards
• Role of Shari’a supervisory boards/ advisers in
mitigating Shari’a risk
• Mis-timing in signing of Commodity
Murabaha contracts can lead to lost income
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Risk In Murabaha
• Title to assets transferred to the customer at
the time of purchase
• Usually the customer then provides same or
other assets as collateral.
• Role of purchasing department is essential
while customer is taking from various
institutions banking Murabaha facility.
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End of Presentation
Thank you for your attention