Islamic Modes:
Murabaha and Salam–
Islamic Microfinance Workshop
CIBE Training Program
Muhammad Khaleequzzaman
Head Islamic MFIing & Finance
IIU Islamabad
Training Workshop – Islamic Microfinance
ISLAMIC MODES/INSTRUMENTS:
– Sale Contracts:
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Murabaha/Murabahah to the Purchase Orderer
Salam/Parallel Salam
Istisna’/Parallel istisna
Participatory Modes:
•
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–
Mudarabah/Resource Mobilization
Musharakah/Diminishing Musharakah
Rent based Modes:
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Operating ijarah
Ijarah wa iqtina’
Training Workshop – Islamic Microfinance
Sale Defined:
Exchange of a thing of value with another thing of
value with mutual consent OR the sale of a commodity
in exchange of cash.
Elements of a valid sale:
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Contract ( Aqd )
Subject matter ( Mabe’e)
Price ( Thaman )
Possession or delivery ( Qabza )
Training Workshop – Islamic Microfinance
Rules of Sale: [Sale Defined and Elements of Sale]
1. Subject must exist at the time of sale
2. Subject must be in the ownership of seller – Physical or
constructive
3. Sale must be instant and absolute
[exception of above rules in Salam and Istisna’]
4. Subject should be halal
5. Subject must be known and identified
6. Sale must be unconditional
7. Delivery of sold item must be certain
8. Price of subject must be certain
Risks and responsibilities attached with the subject
must transfer from seller to the purchaser as a result
of sale
Training Workshop – Islamic Microfinance
Types of Islamic Sale
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•
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Bai muajjal
Murabaha
Musawama
Salam
Istisna
Murabaha:
Uses of Murabaha
•
Sale of raw material
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Sale of cart
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Sale of equipment
•
Sale of agricultural inputs
•
Sale of consumer goods
•
House material financing
Theory & Practice of Murabahah
Outline:
1. Murabahah – Brief Historical Perspective
2. MFIing Murabahah/Murabahah to the
Purchase Orderer
3. Procedural details of Murabahah as practiced
by Islamic MFIs
4. Issues in Murabahah
5. Documentation
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Murabahah – Concept and Shariah Legitimacy
Murabahah defined:
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•
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Selling a commodity as per cost with a defined and agreed
margin of profit (Ribh)
Profit may be a percentage of the selling price or a lump sum.
The transaction may be concluded with or without any promise to
purchase by the client: Ordinary Murabahah / MFIing Murabahah
or Murabahah to the Purchase Orderer.
Shariah Legitimacy of Murabahah:
•
Qura’an:
•
Sunnah:
“It is no crime for you to seek the bounty of your
Lord” [Surah Ale Imran: 198]
“
Allah has permitted trading and
forbidden Riba ” [Surah Al-Baqarah: 275]
The Prophet (PBUH) purchased a she camel from Abu
Bakr (RAA) for use as transportation from Medinah...
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Murabahah – Historical perspective
• Introduced as new form of sale in second half of First
Hijrah century as a sale with necessary condition of
declaring cost by the seller and agreeing on profit
margin by both the seller and the purchaser [AlMuwatta, Imam Malik]
• Modifications were made by Imam Shafii’, including an
order of the purchaser, who could subsequently
exercise the option not to purchase the same, and
also included credit transaction
• He clearly bifurcated two sales’ transactions
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Process Flow:
– Negotiation/Approval of overall limit
– MOU/Master Murabahah Facility Agreement
– Requisition + Undertaking + Security Deposit (Hamish
jiddiyah - Optional) + Invoice
2
MFI
Client
MOU/Master MFA
Approval of Limit
1
Requisition, Undertaking, Sec. Dep.
2
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
– Third party appointed as agent [Optional] –
– Clint can be appointed agent [case of dire need]
– Payment to the Supplier – Direct
Payment in Supplier’s Name
Agent
(Client)
3
Receipt of Payment
Agent
Client
(3rd Party)
MFIMFI
Agency Agreement
Invoice
2A
2
1
Supplier
Payment
3
2
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Possession
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•
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Payment to supplier
Discount of supplier/benefit to client
Title of goods
Transfer of risk and responsibilites
Risks and Responsibilities
MFI
Title
Supplier
Agent
(Client)
Goods
Agent
(3rd party)
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Conclusion of Murabahah
Personal/group sec.
Offer to Purchase
2
Client
MFI
Acceptance of Offer
3
Receipt , Possession Report
1
Sec. Deposit/Hamish jiddiyah

4
3
DP Note
Payment of Murabahah Price
Murabahah Price
1
Client
MFI
Murabahah Terminates
2
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Purchase of poultry feed stock
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Murabahah transaction: Rs. 30,000
Murabahah Facility:
90 Days
Payment:
Each month
Rate of Profit:
15% p.a.
Freight:
5% of cost of goods
Security:
Personal/group
guarantee
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Pricing of Murabahah [Example]:
Particulars
Amount (Rs.)
Cost of goods
Rs. 30,000
Rate of Profit
15% p.a.
Freight/Insurance
5% of cost
Total cost
30000 x 5%
Profit
31500 x 15% x 90/365 = 1165
Murabahah Price
31500+1165 = 32665
Installment
31500/3+1165/3 = 10888
30000 + 1500
=31500
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Issues in Murabahah:
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Unilateral promise/undertaking
Invoice in the name of MFI
Prior contractual relationship (customer and supplier)
Vendor being third party/blood relation/wholly owned
institution of customer [Buy back (Inah)]
Commitment or credit facility fee
Documentation charges
Hamish Jiddiyah/treatment/timing
Timing of promissory note
Rollover/Default in payment of price
Rebate on early payment
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Documentation:
• Murabahah Agreement and Allied Documents:
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–
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Parties to the Murabahah
Subject matter
Cost price
Profit Margin
Value Date – Disbursement date of Cost Price
Contract price
Default clause/penalty
Right of set off i.r.o client’s credit balance
Agency agreement as separate contract
Purchase Requisition
Invoice
Receipt of payment to the supplier
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Documentation:
•
•
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•
Declaration
Securities as per security documents
Demand Promissory Note
Schedule of payment
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Risks in Murabahah:
Risks
Mitigants
Customer refuses to
purchase while holding
as agent
Promise, HJ,
Customer already
purchased from
supplier/wants
liquidity/Inah
Direct payment to supplier, date of invoice to
be after date of agency agreement, obtain
other documents – gate pass, truck receipts,
physical inspection, etc.
Overdue installments
Penalty to go to charity
Default risk
Collateral/securities
Market (price) risk
Immediately supply the item
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Some Applicable Guidelines from AAOIFI:
A. Measurement of asset value
• At acquisition – Measured and recorded at
historical cost.
• After acquisition –
– Asset available for sale to client shall be
measured at historical cost
– In case of default in payment of Murabahah price,
the asset shall be measured at cash equivalent
value
(ie. Net realizable value).
– A provision to be created for decline in the asset
value (ie. Difference between acquisition cost and
the cash equivalent value).
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Some Applicable Guidelines from AAOIFI:
B. Potential discount after acquisition
• The discount shall not be considered as revenue
• However it should reduce the cost of goods.
C. Profit recognition
• Profit shall be recognized at the time of executing
contract if the term does not exceed the current
financial period.
• Profits of credit sale whose payment is due after the
current financial period shall be recognized as per
following:
– Proportionate allocation of profits
– Profit may also be recognized as and when received.
M. Khaleequzzaman IBF, IIUI
Theory & Practice of Murabahah
Some Applicable Guidelines from AAOIFI:
D. Failure to fulfill promise having paid Hamish
Jiddiyah
• Hamish Jiddiyah to be treated as liability on Islamic
MFI.
• Treatment:
– The amount of actual loss to be deducted from
Hamish Jiddiyah
E. Penalty – Deposited in Charitable A/C on realization
M. Khaleequzzaman IBF, IIUI
Salam
Islamic Modes – Agricultural Financing
Salam: Defined
A salam transaction is the purchase of a
commodity for deferred delivery in exchange for
immediate payment. It is a type of sale in which
the price, known as the salam capital, is paid at
the time of contracting while the delivery of the
item to be sold known as subject matter of salam
(al Muslam fihi) is deferred. Salam is also known
as Salaf (lit: borrowing)
Salam: Purposes
– Liquidity needs of farm production
– Working capital/Running Finance
– Project finance (partial requirements)
Islamic Modes – Agricultural Financing
Salam: Shariah Legitimacy


Allh says “O ye who believe when you deal with
each other, in transactions involving future
obligations in a fixed period time, reduce them to
writing” [Al Baqara Verse 282]
Ibn Abbas reported, the Prophet (PBUH) came to
Medina and found that people were selling dates
for deferred delivery (salam) after a duration of
one or two years. The Prophet (PBUH) said:
“whoever pays for dates on a deferred delivery
basis (salam) should do so on the basis of
specified scale and weight” [Bukhari and Muslim]
Islamic Modes – Agricultural Financing
Wisdom of allowing Salam

Farmers, orchard owners, merchants can fulfill
their working capital and liquidity needs before
the commodity is ready to be sold
Three major problems and solutions
1.
2.
3.
Risk of default by seller [personal/group
guarantee/ hypothecation]
MFI’s need to liquidate goods after delivery
[parallel salam]
Seller’s inabillity to produce or procure
commodity [receive back the same price]
Islamic Modes – Agricultural Financing
Salam:
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An exception to the possession
•
A purchase contract opposite to Murabahah
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Benefits both the seller and purchaser
•
Payment of full price at spot - otherwise selling debt for
debt
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Allowed in commodities satisfying condition of Dhawatul
Amthal - quality and quantity can be specified exactly
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Product of a particular field or farm cannot be sold
•
Quality and quantity decided in un ambiguous terms
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Quantity should be agreed in specific terms (by weight,
volume or measure)
Islamic Modes – Agricultural Financing
Salam:
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Certain date and place of delivery
•
The commodity should remain in the market throughout the
period of contract [Different opinions]
•
The time of delivery should be sufficient to allow use of
salam capital conveniently and effect prices, preferably be at
least 15-30 days from the date of contract [Different
opinions]
•
A security/guarantee or is preferred as safeguard to the risk
of default
•
Only commodity is delivered and not the money
Islamic Modes – Agricultural Financing
Salam: Alternatives Available to MFIs of
Taking Delivery of Commodity:
1. By establishing a subsidiary
2. By appointing the third party or client
its agent to sell the commodity
i.
The agency agreement should be
separate from the salam agreement
ii. If agent has been able to sell the
commodity at a price more than the
one agreed in agency agreement,
agent gets the difference
3. By opting for Parallel Salam or Third
party sales
1
2
Payment of Salam Price 1-1-07
Salam Contract Wheat 2000 kg.
Signed 1-1-07 Delivery 30-6-07
Sale Proceeds
MFI
3
3C
Farmer
Salam
Transaction
Agent
Delivery of Wheat 30-6-07
Sale Proceeds less Commission
Third Party
Purchaser
3A
Sale of Wheat
3B
Sale Proceeds
1 Salam Sale Contract 1-1-07, Wheat 2000kg.
2 Salam
Salam
Price
Price
Payment
Payment
1 1-1-07
June 06
Parallel
Salam
3
Delivery of
Commodity
20 Dec
5-7-07
2006
6
Price
of Price
Payment of
Payment
15-1-07
5
Purchaser/
Purchaser
Seller
MFI
MFI
2nd Salam Contract
Farmer
Client
Delivery of
Commodity
20
30-6-07
Dec 06
Third Party
Third Party
2nd Salam
2nd Salam
15 June 06
15-1-07
4
Salam Price Payment 1-1-07
Farmer
Delivery of
Commodity
30-6-07
Third Party
Promise
Purchaser
Seller
MFI
4
6
5
Delivery of
Commodity
5-7-07
Third Party
Promise and
Payment
15-1-07
2
Promise to Purchase
Salam Sale Contract 1-1-07
Pays 5-7-07
1
3
Islamic Modes – Agricultural Financing
Rules of Parallel Salam and Third party
promise
• Both the contracts viz. salam and parallel salam
must be independent of each other
• Parallel salam is allowed only with third parties.
Therefore the original seller cannot be entered into
the parallel salam
• The third party giving unilateral promise should
not pay the price as this is not allowed in Shariah
Examples of Products
THANKS