Murabaha to the Purchase
Orderer.
PRESENTED BY
MOHAMMAD MOHSIN AHMED
at
AlHuda CIBE Workshop at Avari
Hotel – Karachi
1
MURABAHA
Murabaha is a particular
kind of sale where the seller
discloses its cost and profit
charged thereon.
 The price in this sale can be
both on spot and deferred.
2
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.
3
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.
4
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
10
CREDIT APPROVAL (under
Shariah perspective)
Points to Be Considered
While Approving Credit
The Institution must insure 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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CREDIT APPROVAL (under
Shariah perspective)
 Nature of the Business to be in scope of the
Murabaha . Nature of business should be
Halal in order to finance it through
Murabaha.
 Differed payment not permissible in case of
Gold, Silver and Currencies.
 Cyclical nature of the business
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CREDIT APPROVAL (under
Shariah perspective)
SPECIFIED Commodities study in
respect of
– Uniqueness
– Pricing
– Active Market
– Risk Profile
– Cash Flow Analysis
Commitment Fee not permissible.
After these consideration limit may
be approved
13
CONTINUED
 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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CONTINUED
If the supplier is nominated by the
client himself, guarantee for good
performance can be demanded.
 An advance payment (called
Hamish jiddiyyah) may be received
from the customer as a form of
security deposit.
 In case of breach of promise
Hamish Jiddiyyah can be used to
recover actual damage however it
cannot be used for covering the
Cost of Funds / Opportunity Cost.

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STAGES OF MURABAHA
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
Sharia
Perspective it is preferable to appoint
the Agent other then 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
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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ACQUIRING POSSESION
If there is a rise in prices and the
amount escalates for which financing
is availed than the transaction can only
be executed if the bank has been
informed and the bank subsequently
accepts the same.
The institution reserves the right to
reject the purchases if made other
then agreed price.
22
ACQUIRING POSSESION
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.
23
ACQUIRING POSSESION
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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ACQUIRING POSSESION


Acquisition Of Title & Possession
Of The Asset
1. 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.
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ACQUIRING POSSESION
2.Goods must exists at the time of execution of
Murabaha.
 If the above two are not fulfilled than the
institution cannot execute Murabaha.
 Documentary evidence required at the time
of possession before execution of Murabaha
i.e delivery challan, gate passes and sales tax
invoices.
 Murabaha payment to be made directly to the
supplier by the bank.
26
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
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.
 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.
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EXECUTION OF MURABAHA
 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 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
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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ISSUES IN MURABAHA
Buy Back
 Under
Murabaha
Financing
once
the
goods
purchased by the client from the Bank the same
goods cannot be Pledged/ Hypothecated for raising
finance facility from the Islamic Bank.
Rebate on Early Payments
 It is prohibited by Shariah Standards to give Rebate to
the client on early payment as under Murabaha the
price is fixed.
34
Murabaha
Step by step Murabaha
financing
1.
Client
and
bank
sign
an
agreement to enter into Murabaha.
Islamic
Bank
Agreement to
Murabaha
Client
35
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
36
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
37
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
38
Risk Management
IN
MURABAHA
39
Risk
Dimensions
Banking
Risks
Credit
Liquidity
Credit
Credit
Interest Rate
Market
Islamic Banks also face
-Additional asset risk
Foreign Exchange
-Greater fiduciary risks
-Greater legal risk
Solvency
Operational
40
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
Live cases
– Mistiming in signing of Commodity
Murabaha contracts can lead to lost
income
41
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
JAZAKAMUALLAH
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