BSB7303 – Islamic finance 2
YUMYME CHOCOLATES
Group Assignment - Report
STUDENTS:
MUSTAFA HASSAN (201102031)
Hussain Ali (201100230)
Abdulla Alturabi (201200498)
Tutor: Mr. Nedal El-Ghattis
JUNE 1, 2015
Table of Contents
1.0 Introduction:.............................................................................................................................. 2
2.0 Definitions and legal - Shari’a basis for Murabaha:................................................................... 2
2.1 Explanation: ........................................................................................................................... 2
2.2 Legal /Shari’a basis ................................................................................................................ 2
3.0 Advantages and disadvantages of Murabaha contract compared to other modes of finance 4
3.1 Advantages of using Murabaha to the bank: ........................................................................ 4
3.2 Advantages of using Murabaha to the client: ....................................................................... 5
3.3 Disadvantages of using Murabaha for the bank: .................................................................. 5
3.4 Disadvantage of using Murabaha for the client: ................................................................... 5
4.0 The required forms and documents used in Bank AL-Baraka: .................................................. 6
5.0 The procedures for providing the money: ................................................................................ 7
6.0 The risks involved in Murabaha contract and the mitigations: ............................................... 10
6.1 Credit risk: ........................................................................................................................... 10
6.2 Market risk: ......................................................................................................................... 11
6.3 Operational risk: .................................................................................................................. 11
7.0 Conclusion: .............................................................................................................................. 12
8.0 References ............................................................................................................................... 13
9.0 Appendices: ............................................................................................................................. 15
1|Page
1.0 Introduction:
We are writing this report in order to explain the finance solution which be provided to
finance the business proposal (Yumyme Chocolates factory) using Murabaha contract in
bank Al-Baraka. In this report we will explain the definitions and Sharia biases for
Murabaha, as well as the advantages, disadvantages, the required documents,
producers and the risk involved in this process.
2.0 Definitions and legal - Shari’a basis for Murabaha:
2.1 Explanation:
Murabaha contract is a sale contract, in which the bank buys the asset for the client and
sale it back to the client with profit. Usually the bank buys the asset in full and resale it
to the client on deferred payment. (Investopedia, 2008)
2.2 Legal /Shari’a basis
The bank’s SSB is composed of six members. They are as follows: Shaikh Dr. Abdul Sattar
Abu Ghudah (Chairman), Shaikh Abdulla Bin Sulieman Al Mannea (Member), Shaikh Dr.
Abdullatif Al Mahmood (Member), Shaikh Dr. Abdulaziz Bin Fowzan Al Fowzan
2|Page
(Member), Dr. Ahmed Mohiyeldin Ahmed (Member), and Dr. Eltigani El Tayeb
Mohammed (Secretary to the Shari’a Supervisory Board).
These members are responsible for: issuing fatwas for the Board of Directors and
Management members to abide by. And review the new products, it gets reviewed by
the bank’s Board Audit & Governance Commit. Lastly, al-Baraka supervisory board
works closely with AAOIFI, and therefore the Murabaha contract structure has been
constructed using AAOIFI standards.
As for the auditing in the bank, Mr. Hamad Abdulla the Head of Financial Control in AlBaraka is also the Vice Chairman in AAOIFI; therefore the auditing process in the bank is
very effective. In addition to that, Al-Baraka has directed the Board Audit and
Governance Committee do a constant and regular auditing process on all the bank
activities in order to make sure that the bank is running effectively under the AAOIFI
standards. (2014 Annual Report, 2015).
Dr. AbdulSattar has compiled a list of fatwas and sharia principles to abide by for the
execution of a Murabaha contract. All of these fatwas are presented based on the
Quran, the Sunna (traditions, practice and sayings of Prophet Mohammed). Therefore,
the following are several examples of fatwas that have been answered to provide
clarification on matters as to being whether the practice discussed is halal or haram.
The first topic discussed is actually one of the most essential factors in a Murabaha
contract, which is the meanings and purpose and not the words and phrases. Many
banks nowadays are not properly practicing Murabaha sale. A Murabaha transaction
doesn’t become sharia-compliant if the word “interest” is replaced with “profit” or
“mark-up. All conditions specified by the Sharia must be observed to make sure of the
Sharia’s validity. ” (Abu Ghuddah, n.d.)
Another important factor to consider is the promise. Malki jurists believe that a promise
is legally binding while other schools of thought don’t necessarily believe it’s binding.
In regards to insurance, AbdulSattar believes that insurance amount should be included
as part of the purchase cost but no profit should be incurred from it. In other words, it
will be a cost for the customer but won’t include an additional profit cost.
In the report, it has been discussed whether an additional portion of the administrative
cost can be used as commission to pay an employee. This is not allowed according to
Sharia principles. Commission should be paid from the bank’s funds and not incurred as
a cost on the customer.
Since a guarantor must be provided by the customer, he may wonder if the property
itself can be used as a guarantee. This is impermissible because the bank doesn’t own
the property until the settlement of its price via the contract. In addition, ownership will
eventually be transferred to the customer after maturity.
3|Page
Al Baraka bank may also finance its Murabaha transaction via other banks. The bank
may use other modes of participation (i.e. Mudarabah or Musharaka) with profit
percentages pre-agreed and then the bank carries out its transaction with the customer.
The chairman has also discussed issues related to cancelled documentary credit of
Murabaha or if the purchase promise was not executed. According to the Board’s view
in this matter, if the execution of the Murabaha transaction failed due to any reason in
relation to the purchase promise, then the customer will have to bear the costs of the
damage thereof.
3.0 Advantages and disadvantages of Murabaha contract
compared to other modes of finance
Under the assumption that the factory (Yumyme Chocolates) has been bullied, and the
business owner needs working capital in order to buy machines and equipment for the
factory.
Giving the fact that Al Baraka Bank has four main modes of financing; Murabaha, Ijara,
Istisna, and Musharaka, and doesn’t have a contract that offers cash for working capital;
therefore the best alternative solution is to finance the business through Murabaha
contract. (Albaraka.bh, 2015).
The following will discuss the benefits for of Murabaha for both the customer and bank
when compared to other contracts:
3.1 Advantages of using Murabaha to the bank:
A. The first and most important advantage of Murabaha is that the client is responsible
for maintenance and insurance of the asset as the client will be the owner of that
asset, unlike Ijara in which the bank is the owner and the responsible for major
maintenance and insurance. (Islamic Mortgages from Mortgages for Muslims, 2015)
B. Mudaraba mode carries a high level risk for the bank, while in Murabaha the major
risk that the bank deals with is default risk. Mudaraba is extremely risky because the
bank is providing working capital to the Mudaraba (customer) who undertakes the
work as well as management but will only be held accountable for losses in case of
negligence. Therefore, the bank will bear any losses if the Mudarib fails to generate
profit given that he is not negligent nor violated the terms of the contract. In
Murabaha, however, the main risk that the bank should take precautions for is
default risk. The risks is minimized via a guarantor. (Albaraka.com, 2015)
C. Al-Baraka also have a partnership with Tamkeen to used Murabaha, in which they
provide financing for small to medium projects. This is beneficial for bank because in
case of the customer defaults, Tamkeen will cover 50% of the loss. (Appendix 2).
4|Page
3.2 Advantages of using Murabaha to the client:
An advantage to the client is that Al Baraka Bank has an exclusive feature only to
Murabaha contracts called revolving Murabaha. This means that the client can use a
specified amount several times in case a he wishes to purchase items multiple times in a
given period of time. Other types of contracts don’t include this feature.
In Murabaha, the bank will agree to finance the business at the beginning on the
condition that the customer will pay back on deferred payments. This is a suitable
alternative solution since he’s requesting working capital. Other forms of financing are
not necessarily similar. For example, Musharaka is a partnership where both parties will
have to contribute to the working capital, and this doesn’t match with customer’s
needs. As a result, it cannot be used. (Islamic Finance Affairs, 2007)
3.3 Disadvantages of using Murabaha for the bank:
A. A big disadvantage for the bank in using Murabaha is that the installments are fixed,
therefore the bank can’t charge extra on late payment or discounts on early
payments buy they only can charge a penalty which will go to charity. (Islamicbanking.com, 2015)
B. Since the cost of the machines reqisted by the business owner will be paid by the
bank in full, it can be seen as a drawback for Al Baraka Bank. The reason is that this
method is far costlier than other methods such as Musharaka. With that being said,
it’s very important for the bank to consider the time value of money since they are
providing numerous Murabaha financing to other customers as well. (Zandi &
Ariffin, 2015)
3.4 Disadvantage of using Murabaha for the client:
Another unattractive feature of Murabaha finance is its inflexible payment terms. It is
not permissible by Sharia to change the installments amount of the Murabaha sale.
Therefore, in case the customer defaulted, he may face serious legal consequences as
well as overdue repayment, the costs will all be imposed on the guarantor, while other
modes of finance like Ijara, flexible payment terms is allowed. (Albaraka.com, 2015)
Even though Murabaha quote all costs plus profit in the contract, a minimum down
payment of 10% has to be paid to the bank in order to carry on with the contract. This
amount can be seen as a disadvantage and unattractive to customers. For this case, the
customer is requesting capital financing to run the factory, which will make it difficult
for the client. While In Ijara, the customer will pay the entire amount based on monthly
installments and no upfront rentals (Symmetrydigital-labs.com, 2015).
5|Page
4.0 The required forms and documents used in Bank AL-Baraka:
The client or the business owner that wants to be financed by Bank Al-Baraka will be
required to fill in and send many documents, in order for the financing process to be
completed, and these documents include:
A. Application form (appendix 1): is the first document that the client has to fill in. in
this document the client will have to write in:

general and legal information about the business

Marketing strategy as well as a study of the market or the industry.

The required amount, purpose of finance and the expected results to the business
performance after the finance.

Projected income statement for the business upcoming years.

Declaration by the client of the accuracy of the provided information, as well as
approval of the terms and conditions of the financer.

General terms and conditions of the financing service.
B. Required documents (appendix 1): the client will be asked to attach several
documents with the application form, which includes:

Company profile and Copy of the business licenses

Memorandum & article of association

Quotations of the required items and detailed facility utilisation breakup

Recent audited finical statements and Feasibility study

Bank account statement

Latest electricity bill
C. Credit Approval Routing Slip (appendix 2): this document contains the results of the
study done on the finance application sent by the client, and has the approval or the
rejection of the committee members responsible for this study; this document
contain three main sub-documents:

Credit application review is a general study of the business background, main
products and customers, as well as the recommendations and approval from
6|Page
the relationship manager, Head of credit and the committee members to this
application.

Financial analysis of the income statement, balance sheet and the cash flow
statement.

Corporate credit risk rating which is done based on the performance of the
company in the Non-Financial and the finical factors.
D. Facilities agreement (appendix 3): is a document that contains all the terms and
conditions of the finance agreement which will be done between the bank and the
client, and this document covers all the previous and current facilities agreement
done between the bank and the client.
E. The offer letter (appendix 4): is a letter sent to the client to accept the mentioned
terms and conditions in the facilities agreement.
F. Agency contract (Wakala) (appendix 5): is a contract that gives the client the
authority to make buying and selling decision on behalf of the bank, within the
agreed terms and conditions.
G. Local purchase order (appendix 6): is a document that the client can used in order
to ask the bank to buy the items that he/she wishes to buy, and usually contain a
promise to buy from the client.
H. Invoice (appendix 7): is a document issued by the seller to the buyer and provides
details of the purchased items, such as quantities and prices.
I. Payment against invoice letter (appendix 8): the client will have to send a letter to
the bank and attach the invoice in order to ask them to pay for the vendor and buy
the items, and in this letter the client will provide the vendor’s bank details. (Ahmed,
2015)
5.0 The procedures for providing the money:
Bank al-Baraka has recently introduced a new financing service called “Small and
Medium Enterprise Finance” in collaboration with Tamkeen; which is a Sharia compliant
service to finance businesses through Murabaha contract.
In order for any client to apply for this service he/she will have to go through serval
steps and provide serval documents in order to complete this process.
7|Page
A. In the starting stage the client will be asked to fill in an Application form (appendix
1) and submit it alongside with a list of required documents. The application form
should contain general and legal information about the business, finance
requirements and purpose, market study and projected income statements.
Additionally, the banks will ask the client to provide the required documents and attach
it with the application from, which contains (company profile, copy of the business
license, memorandum & article of association, quotations for assets required for
financing and most importantly, the recent financial statements of the business and the
feasibility study).
B. After receiving the application form and the required documents from the client, the
bank will form a committee with members from different departments to study the
application by analyzing the financial statements and the feasibility study attached
with the application form, and will look into the purpose of finance in order to form
a decision on whether or not they should finance the client. The committee
members will analyze the following:

The business background and main activates

The business financial statements, to check the business recent performance.

The market or the related industry performance.

The purpose of the required financing amount and the upcoming plans for the
business.

The feasibility study, in order to understand the business idea and it’s expected
the future.
And then the members will write the analysis results in the Credit Approval Routing
Slip (appendix 2) and will either sign their approval or rejection on the client
application.
C. After finishing the analysis of the client’s business and the client get accepted to be
financed by the bank, then the bank will send the client the Facilities agreement
document (appendix 3) and the Offer Letter (appendix 4), in order for him/her to
understand the conditions that the finance will be provided in; and if the client
agreed he/she will have to signs the document within a certain period of time.
8|Page
D. As soon as the client signs all the agreements and documents (facility agreement
and offer letter); the bank then will establish a credit line for the client, in order to
be able to finance him/her through it on the bases of Murabaha.
E. The bank then will sign an Agency contract (Wakala) (appendix 5) with the client in
case he/she was trustworthy, in order for the client to act as an agent of the bank
and buy the required assets by himself/herself.
F. Afterwards, The Murabaha financing process will be done on two sections:

The first one is Murabaha (one off): this Murabaha is done only once and
usually made at the beginning of the financing process; it could be used in order
to buy something necessary to the establishment of the business such as a land
or heavy machinery.

The second is (revolving) Murabaha: in this Murabaha, the bank will specify a
certain amount to finance the client for a certain period and the client will be
allowed to use this amount for multiple times as long as he/she pays it back in
full with the agreed profit margin. Usually, the bank sign an agency contract
with the client in order to give him/her the power to buy the required items on
behalf of the bank and resale it back to himself/herself.
The business owner needs working capital and the only contract that can
provide cash is Tawraq, but because this contract is not used in Al-Baraka bank
therefore the best alternative solution will be revolving Murabaha.
G. Finally, the client will ask the bank to buy the required assets by sending a local
purchase order (appendix 6) paper to the bank and will include all the details of
those assets he/she requires; in addition to that the client will sign a promise to buy
those assets from the bank on the bases of Murabaha and based on the agreed upon
conditions.
9|Page
H. Then, the client will bring an invoice (appendix 7) document from the vendor to the
bank, which includes all the details of the products and the prices, and this invoice
will be sent with a letter to the bank (appendix 8) asking them to pay against the
invoice in cash.
The bank then will buy the assets which the client asked for and resale it to the
client with profit on the bases of Murabaha, and the asset ownership will be
transferred to the client. (Ahmed, 2015)
6.0 The risks involved in Murabaha contract and the mitigations:
When financing projects, Murabaha contract is mostly used than other modes of finance
offered by the Islamic banks such as Mudarabah, Tawarruq and even Ijarah. However,
using Murabaha contract offers some risks associated with its practice, similar to each
other contracts that have its own risks involved, here are the risks in Murabaha contract
when financing the chocolate factory Yumyme, which can be divided as following:
6.1 Credit risk:
Credit risk occurs when the client defaults in his payments to that bank in the periods
agreed on. It is defined as a serious risk where the bank cannot set specified rules or
penalties for the client to overcome it, because according to the Shariaa the bank
cannot increase the amount agreed upon in the Murabaha contract thus once the
contract is signed it cannot be changed. However, Al-Baraka bank has some mitigation
plans to minimize the risk as much as possible, from the interview made with Mr.
Ahmed the manager in the credit department said that the bank will ask the client to
sign postponed cheques for all the future installments from begging of the contact till its
maturity. Also, this act as a last point of push on the client for the bank in case the client
defaulted in payment, the bank will have this as a prove in case it contacted the
authority and send him to jail. (Ahmed, 2015). Moreover, in facilities agreement of AlBaraka (Appendix 3) in the requirements section 5th point in page 4 state that in case of
late payment the bank will charge 1% each month of the required amount as a penalty
and this amount will be distributed to charity purpose in accordance to the bank
Sharia’a supervisory board. Appendix B credit approval routing slip shows a security
measurement where, a mortgage property covering exposure by 1.3 times also,
Tamkeen will cover 50% guaranteed in case of loss of project.
10 | P a g e
6.2 Market risk:
Market risk starts from the economics condition of the country, it contains many factors
in it which makes the market risk a serious issue for any bank within its jurisdiction.
Inflation to begin with is a factor and inflation show the power of the currency, where if
it increased the value of the currency will decrease meaning that the payment that the
bank will receive will be less in value than what it gave as a loan in the first place. Other
risk linked to the bank and the project is the Bahraini Food industry, the risk of
availability of products and ingredients required to manufacture the chocolate products
such as the wheat, milk, flour, peanuts, and chocolates flavor. also the risk of maintain
these products through good air conditioned warehouse since food is very sensitive to
hot weather and gets damaged with bacteria easily.
Market risk is a major risk and there many elements that contribute to its difficulty to
overcome it, the only mitigation plan that any bank can do is to do a very well done
feasibility study about the Bahraini food market and the project itself within its specific
industry that the Chocolate Factory (Yumyme) operates in, before approving any project
financing and even ask the client to bring a market analyst report about his project, also
Mr. Ahmed stated that it is recommended to bring a projected financial statements of
the business which will help in making decisions for approving the finance. (Ahmed,
2015). Fortunately, we can see that Bahrain economy is doing very where its average
inflation rate is around 2.2 which is steady and considered to be very good for the
economy and the industry. (Tradingeconomics.com, 2015).
Also, the food industry in Bahrain is growing rapidly where we have Kraft Company state
factory in Bahrain, which is the ranked secondly in term of largest Beverage and Food
Company in the world. Also, all the equipment and ingredients are available where
Bahrain flour mill produce 120,000 tons of flour each year and 600,000 tons of sugar,
moreover other companies such as Awal Dairy which is Bahraini company producing
fresh milk and dairies. Therefore, the risk of establishing a chocolate factory in Bahrain is
considered to be low (Bahrain.com, 2015).
6.3 Operational risk:
Refers to all types of internal risks that face the Islamic banking institution, such as poor
internal system, community, and processes. One major risk can be defined as the
Shariaa control and audit system, as they come through doing their job in auditing some
problems occurs in choosing the wrong amount of samples to see how the bank modes
of finance are incompliance with the Shariaa. Al-Baraka bank seeks its best to minimize
the exposure of operational risk, where Mr. Ahmed said that the bank has hired
independent professionals in and created a risk committee headed by Mr. Saud Saleh Al
Saleh which is showing in the annual report page 60, where through studying each risk
11 | P a g e
associated with each project and financing to seek the appropriate level of risk to the
level of return. (Ahmed, 2015)
Also, its annual report shows in page 62 that the board of directors selects the Shariaa
supervisory board, and gives them full authority as independent body to set rules and
policies and see the compliance of the bank through their auditing report. The Shari’a
Supervisory Board report in page 78 concluded the following; all the transactions,
contracts till 31st of December are incompliance with Shari’a, also the Shari’a
supervisory board profit and loss allocation are confirmed by the bank basis and
incompliant with Shariaa principles and rules, and finally all funds arise from prohibited
sources will be mandatory by the management to deposited to charitable cause. This
report was signed on 8th of February by the chairman Shaikh Dr. Abdul Sattar Abu
Ghudah, and other members of the board. (2014 Annual Report, 2015).
7.0 Conclusion:
In conclusion, we advise our client use the Murabaha contract that bank Al-Baraka
offers as it provides the best solution to finance the Yumyme Chocolates factory. The
client will benefit from the many features that this contract offers, such as revolving
Murabaha and will be able to complete the project’s requirements of buying more
machines for the factory.
12 | P a g e
8.0 References
2014 Annual Report. (2015) (1st ed., pp. 60, 62, 78). Manama. Retrieved from
http://www.albaraka.com/media/pdf/AnnualReports/al%20baraka%20annu
al%20report%20english%202014.pdf
Abu Ghuddah, D. Ijarah (Lease) (1st ed.). Al-Baraka Banking Group.
Retrieved from http://www.albaraka.com/ar/media/pdf/ResearchStudies/fatwa-ijara.pdf
Ahmed, Y. (2015). Credit Department Manager at Bank Al-Baraka. Al Baraka
Islamic Bank, Al Baraka Tower, Diplomatic Area, Manama, Kingdom of
Bahrain.
Albaraka.bh,. (2015). Al Baraka. Retrieved 31 May 2015, from
http://www.albaraka.bh
Albaraka.com,. (2015). Al Baraka. Retrieved 31 May 2015, from
http://www.albaraka.com/default.asp?action=article&ID=299
Albaraka.com.pk,. (2015). ABPL Auto Ijarah | Al Baraka Bank (Pakistan) Ltd..
Retrieved 31 May 2015, from http://www.albaraka.com.pk/retailbanking/consumer-finance/al-baraka-islamic-auto-finance
Albaraka.com.pk,. (2015). Corporate & Investment Banking | Al Baraka Bank
(Pakistan) Ltd.. Retrieved 31 May 2015, from
http://www.albaraka.com.pk/business-banking/corporate-investmentbanking/
Bahrain.com,. (2015). Food & Beverages. Retrieved 31 May 2015, from
http://www.bahrain.com/en/bi/key-investmentsectors/Pages/Food.aspx#.VWruiz-SySo
Investopedia,. (2008). Murabaha Definition | Investopedia. Retrieved 31 May
2015, from http://www.investopedia.com/terms/m/murabaha.asp
Islamic Finance Affairs,. (2007). Islamic Finance Basics - What is Murabaha,
Ijara, and musharakah/mudarabah?. Retrieved 31 May 2015, from
https://islamicfinanceaffairs.wordpress.com/2007/05/25/islamic-financebasics-what-is-murabaha-ijara-and-musharakahmudarabah/
13 | P a g e
Islamic Mortgages from Mortgages for Muslims,. (2015). Islamic MortgagesMurabaha, Ijarah and Musharaka. Retrieved 31 May 2015, from
http://www.mortgagesformuslims.co.uk/islamic-mortgages-murabahaijarah-and-musharaka/
Islamic-banking.com,. (2015). Institute of Islamic Banking and Insurance Murabaha on Shari'ah Ruling. Retrieved 31 May 2015, from
http://www.islamic-banking.com/murabaha_sruling.aspx
Symmetrydigital-labs.com,. (2015). MCB Pakistan. Retrieved 31 May 2015,
from http://symmetrydigital-labs.com/mcbuat/islamic-banking/maeeshatmurabaha
Tradingeconomics.com,. (2015). Bahrain Inflation Rate | 2008-2015 | Data |
Chart | Calendar | Forecast. Retrieved 31 May 2015, from
http://www.tradingeconomics.com/bahrain/inflation-cpi
Zandi, G., & Ariffin, N. (2015). Issues on Murabahah Practices (1st ed.).
Kuala Lumpu: Islamic University of Malaysia. Retrieved from
http://irep.iium.edu.my/3092/2/Some_Issues_on_Murabahah_Practices_in_
Iran_and_Malaysian_Islamic_Banks.pdf
14 | P a g e
9.0 Appendices:
Appendix 1
Application form
15 | P a g e
16 | P a g e
17 | P a g e
18 | P a g e
19 | P a g e
20 | P a g e
21 | P a g e
Appendix 2
Credit approval routing slip
22 | P a g e
23 | P a g e
24 | P a g e
25 | P a g e
26 | P a g e
27 | P a g e
28 | P a g e
29 | P a g e
30 | P a g e
31 | P a g e
32 | P a g e
33 | P a g e
34 | P a g e
35 | P a g e
36 | P a g e
37 | P a g e
Appendix 3
Facilities agreement
38 | P a g e
39 | P a g e
40 | P a g e
41 | P a g e
42 | P a g e
43 | P a g e
44 | P a g e
45 | P a g e
46 | P a g e
Appendix 4
Offer letter
47 | P a g e
48 | P a g e
49 | P a g e
Appendix 5
Agency contract (Wakala)
50 | P a g e
51 | P a g e
52 | P a g e
53 | P a g e
Appendix 6
Local purchase order
54 | P a g e
Appendix 7
Invoice
55 | P a g e
Appendix 8
Payment latter
56 | P a g e
Appendix 9
Brochure
57 | P a g e