Morabaha Financing
29
Essential of Islamic Finance Islamic Mode of Financing Morabaha “Trade /Commodity Financing” By Yousuf Ibnul Hassan Iqra University 4/2/2014 1 Yousuf Ibnul Hasan [email protected]
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The word Morabaha is taken from the Arabic word Ribh which means Profit. Originally, Morabaha is a contract of sale in which a commodity is sold on profit. The seller tells the buyer his cost price as well as his profit he is adding to the cost. Modern form of Morabaha has become the single most popular technique of financing all over the world.
Transcript of Morabaha Financing
Essential of Islamic Finance
Islamic Mode of Financing
Morabaha“Trade /Commodity Financing”
By Yousuf Ibnul Hassan
Iqra University
4/2/2014 1
Yousuf Ibnul Hasan
The word Morabaha is taken from the Arabic word Ribh.
Morabaha is a trade financing contract in which a commodity is financed in
participation with the trader to be sold on profit through the expertise, experience and
ability of the trader .
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In Morabaha Mode of financing the Party
bringing the funds to finance commodity
for the trade transaction is know as
Financier
And
The party that act as buyer and seller of the
commodities and goods that are financed
on the request is known as
MORAHIB
commonly known as TRADER
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In the Morabaha mode of financing funds are not disburse to MORAHIB against any collateral or other external security
arrangement but secure within the transactional arrangement
Financier provide goods consist of consumable or useable on the request and specification of Morahib at a certain
pre-agreed price of sale by Financier and agreed purchase price by Morahib.
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Morahib is a Trader
Morabaha is a financing mode for trading activities on the basis of sale on profit.
Technically, it is a contract of sale in which the seller declares his cost and profit.
It is an ancient practice which was seen in archives prior to the horizon of Islam.
Morabaha practice developed in Islamic financial system with guidance of Islamic Shariah.
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Morabaha is a financing technique that involves a request from Morahib a LPO
(Local Purchase Order) in favor of Financier for the financing specific goods in which
Morahib deals and have experience.
Financier after appraising the LPO and its requirement, adds its profit over to its cost price on goods and sell to Morahib on the
condition under pre-agreed payment terms.
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The Financier purchase through its
arrangement by employing its funds along with
the Margin (ARBOON) procure as per LPO
condition of specification and deliver these
goods after taking acceptance of receiving the
goods from Morahib through
GRN (Goods Receiving Note) which is duly
signed with remarks that: Goods requested under LPO are received in satisfaction to the requirement. .
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In reality it is wise to settle all the terms in pre-agreed as saying of Prophet Muhammad, May Peace Be Upon Him.
“You must settle your terms in writing and in agreeing prior to your trading
and in trust and for better profitability.”
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How Morabaha mode of finance operates
Morahib needs goods and approaches financier to get the required goods or commodities through financing for commercial trading.
In interest-based system, money is given on the disposal of Applicant (Trader) on interest who remain free to buy the required commodity from the market or can use the fund for other purpose.
This option is not available in Morabaha.
Money cannot be given at the disposal of Morahib.
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Financing against the procurement of goods or commodity is paid to supplier in accordance to request of Morahib.
Morahib approach Financier with his request to acquire goods for trading purpose .
The request must be in writing with clear specification of goods required along with the supplier identification and price declare by the supplier.
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Morahib request for the goods must be supported by the agreed equity (Arboon) amount which is added to the financing to pay the purchases of the goods requested.
Financier using its expertise enter into purchase deal with the supplier of goods and negotiate the price to a minimum possible level.
Supplier Sale price and Morahib declared price if differ then this difference is the part of earning for Financier as efforts are involve which to be compensated 4/2/2014 11
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Morahib cannot claim a part of Financier earning, Financer as good gesture can reduce the profit.
Morahib upon receiving the goods from supplier issue an acceptance confirming the quality and quantity of goods received from the supplier as well as issue detail of stock kept at place.
Financier can also appoint its Muqqadum (agent) who is allowed to receive the delivery of goods and commodities on behalf of Financier as SAFE KEEPER or STOCKKEEPER
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Muqqadum (agent) keeps the goods (stock) under his control and release upon the delivery order which is issued by Financier in favor of Morahib either on the payment or under differ payment terms.
It is compulsory that goods transfer from Financier to Morahib should be on the pre-agreed price which must be integrated in the Morabaha Financing Contract and mention in Purchase Order which must be duly signed by Morahib..
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Morabaha transaction to be completed in two stages.
Firstly, the Morahib requests the Financier to accept a Morabaha transaction and at the same time promises to buy the commodity requested by him on delivery.
This promise is not a legal binding & Morahib may go back on his promise
Financier can hold the Arboon the equity of Morahib and use it to cover the price margin to sell the goods by reducing the price to attract the buyer.
Financier is not legally bound to return any amount to Modarib. However as gesture he can take any decision that favor Morahib
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Secondly, Morahib purchases the good acquired by the Financier on a deferred payments basis and agrees to a payment schedule on various dates.
On such arrangements the profitability of Financier shall not be change and pre-agreed price of resale of goods between the two parties of Morabaha contract shall remain constant.
Morabaha sale contracts allow the commodity sold it to the Morahib or in case if these are refuses to purchased by Morahib then Financier can sell buy at best suitable price taking the advantage of Arboon.
This prime clause of the contracts and it should be accepted by Morahib.
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Two Type of Payment Terms
First is By-Salaam which means advance against delivery of goods in future date.
Second is By Muajjal which is payment under installment at future dates.
In both the terms price of the goods does not rise but can be reduce on the discretion of
Financier or in case prices goes down.4/2/2014 16
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Morabaha financing widely used by the Islamic banks for various kinds of financing requirements.
To provide finance in various and diverse sectors
To consumer finance for purchase of consumer durable such as cars and household appliances
To real estate to provide housing finance
To manufacturing sector for purchase of machinery, equipment and raw material etc.
To finance short-term trade for which it is eminently suitable.
To issue letters of credit.
To finance import trade in today form of FIM (Finance Imported merchandise)
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Imam Baghi
Transaction end on the purchase of CAMEL in CASH by one and sell these CAMELS by other by adding
its profit then sell at a the higher price.
Such contracts end in two sales,
Firstly, they are purchased in cash.
Secondly, they are sold on credit.
.
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Financier pays cash for commodity at the request of Morahib then sells same to Morahib on credit after adding its profit.
In other words, financier by adding its profit to original purchase price
Morahib will have to pay even if the price of the commodity falls as goods were procured and provided on confirmation of Morahib.
In case Morahib fails to sell Financier sell by itself using the margin of Morahib to reduce the price.
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Imam Al Shafai
If a man sees a commodity in the possession of another and agrees to purchase the commodity with the profit set by seller; such transaction is valid, as it is not binding to any of the party of the contract till the close of the transaction.
If a man purchases the commodity and agree to pay the profit, then sale is valid as the purchaser himself agrees to offer the profit.
If Morahib requests Financier to purchased separately the goods on cash and then he shall buy in installments at later stage. The cash based sales accepted.
Under second installation scenario sales would become valid provided Morahib purchase on installment or at cash at an agreed price of contract.4/2/2014 20
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Ibn Rashid
Morabaha sales are approved sales, but sales by mutual consent are preferable.
“Sales by mutual consent are permitted because Morabaha sales according to Imam Ahmed require honesty and integrity on the
part of the seller”.
Temptations has the possibility of being led into inaccuracy in one’s favor of sales which is agreed by
mutual consent.4/2/2014 21
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In case seller cheats with price or capital, sale remains valid, but buyer get entitlement to claim the difference from the seller or drop the sale.
Some Fuqaha say that the buyer has no choice but is entitled to deduct the difference.
Morabaha sales are governed by the same conditions applied to sales in general with most important aspect that both buyers and sellers should know the amount of the financing and the yield.
The seller must declare,
I bought for 100 and claim it for with a profit of ten.
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Selling in Installments of Differed Sales
Time has to be agree on the price based on the period of credit term.
Morahib must agree to pay on maturity. If unable to fulfill financier has the right to claim the
goods by confiscating his Arboon which ultimately covers the price including the compensation for the loss of time.
Morahib have to reveal quantity of stock in hand to financier.
Any discrepancy to original delivered quantity would be paid by the Morahib.
In case of failure to pay, Morahib can be legally punished for misappropriation and theft.
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Some Fuqaha forbid such types of sale, considering the increase in price as Interest, a category of Riba. While some of the Fuqaha permit such sales as it is based on mutual agreement, and agree with Allah as said in Holy Quran:
“Whereas Allah permitted trading and forbidden usury and O’ ye who believe!
Misuse not yours wealth among your selves in pride, except it be a trade by mutual consent”.
Financial institutions use Morabaha financing in both ways,
Differed sales of cost price for those who need the commodity for their personal use and not for trade as seen in Consumer Financing.
On short term basis with limited installments provided to those who cannot afford to pay in one go but with an ability to pay in installments.
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Morabaha Cost-plus Financing
This is a contract of sale between Financier and Morahib at a price which includes a profit margin agreed by both parties.
As a financing technique, it involves the purchase of goods by financier on requested by Morahib.
Goods then sold to Morahib with a built-in profit.
Repayment in installments are specified in the contract as Morabaha Cost-Plus Financing.
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Selling in Installments of Differed Sales
Differed sales or sales by installment could be carried out on the basis of the cost price of commodity.
There is no disagreement on such type of sale and could be carried out and allowed.
Differed sale could be at a higher price than the actual one of the commodity.
Some Fuqaha disagree on that type of sale. But most agree to such sales as seller informs the buyer of cash price and price on deferred payment terms as clear terms for two types of sales transaction.
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Islamic jurists proposed different forms of partnership
to provide credit & finance facility for Agricultural,
Manufacturing and for trading purposes.
These forms of Partnerships are as follows:
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Muzara’a-Sharecropping Muzara' a (sharecropping or crop partnership) is a contract whereby landlord puts his agricultural land at farmer's disposal to farm.Farmer undertakes to give owner an amount of agricultural products. This framework is based on a partnership between capital and labor.
Musaqa-Tree-sharingMusaqa (water partnership or tree-sharing) is a contract whereby one person trim and water fruit trees own by other person or are at his disposal, in exchange for an amount of realize through the sale of the fruits on pre-agreed upon. If a contract of Musaqa or tree sharing is related to fruitless trees, like willows and sycophants, it is not valid.However, it would be valid in such trees as henna whose leaves are used or trees whose flowers are used.
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Morabaha Key Notes Financier is Financier & financing is made for
the procurement of goods and commodities.
Morahib is the party of contract to sell the goods that Financier financed under the contract.
It is not capital base contract and funds are use as financing for purchases of goods.
Morahib has to prove and satisfy the Financier of capabilities know-how of goods requested and marketing and selling plans of the goods that are financed.
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