Murabaha Bankers Perspective

8/3/2019 Murabaha Bankers Perspective

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Islamic Trade Finance

Murabaha:

The Bankers Perspective

Saleem Khan


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Islam prohibits charging fixed interest on money, but permits

charging fixed profit on sale of goods. This clears a common

misconception that charging fixed profit is haram.

Islamic banks therefore use a sale-based transaction(Murabaha) instead of a term loan for financing purchase of

assets by their clients, especially for working capital

requirements

Over 60% of all business volume of Islamic banks comprises of

Murabaha transactions

Murabaha


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Murabaha is a particular kind of sale

Where the transaction is done on a cost plus profit basis

i.e. the seller discloses the cost to the buyer and adds a

certain profit to it to arrive at the final selling price

The distinguishing feature of Murabaha from ordinary sale is

- The seller discloses the cost to the buyer

- And a known profit is added

Murabaha


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Murabaha is simply a sale transaction

Which is being used by Islamic Financial institutions as a mode

of financing by routing the transaction through Bai Muajjal.

Murabaha


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As per the rules of Shariah the seller cannot sell the goods

unless they come into his ownership.

However, since goods are to be purchased from the market,

they need to be identified and purchased.

The bank , being a financial institution does not have theexpertise to identify the goods and negotiate an efficient price.

The customer, however, being in the industry, can do this. The

Bank therefore appoint him, in the first step of the transaction,

to identify and procure the goods on the banks behalf.

Murabaha


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Once the customer purchase the goods the risk of the goods

transfers to the Bank. Bank can now sell these goods to the

customer.

Please note that the customer play two different roles in this

transaction. On that of Banks agent and other of purchaser.These roles should be clearly segregated to make the

transaction halal.

This process is explained in detail in next slides.

Murabaha


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Step by step Murabaha financing

1. Client and bank sign an agreement to enter into Murabaha.

Murabaha

Agreement toMurabaha

Bank Client


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2. Client appointed as agent to purchase goods on banks behalf

Murabaha


Agency

Agreement

Bank Client



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3. Bank gives money to client for purchase of goods.

Murabaha



AgencyAgreement

Disbursement to the client

Islamic

BankBank Client


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4. Client purchases goods on banks behalf and takes their

possession.

Murabaha


Client

purchasesgoods andtakespossession

Transfer of Risk Vendor

Bank Client


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5. Client makes an offer to purchase the goods from bank.

Murabaha


Offer topurchase

Bank Client


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6. Bank accepts the offer and sale is concluded.

Murabaha


Murabaha Agreement+

Transfer of Title

Bank Client


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7. Client pays agreed price to bank according to an agreed

schedule. Usually on a deferred payment basis (Bai

Muajjal)

Murabaha


Payment of Price

Bank Client


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Murabaha -Risks

In a conventional transaction the banks takes risk on the client,

however in a Murabaha transaction the Bank takes the

following risks:

1. Asset Risk

Since for a short period of time the risk of Asset is transferred

to the bank.

2. Credit Risk

Since once money is receivable from the customer, the risk of

non-payment does exist


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Murabaha -Mitigants

Assets Risk can be minimized by getting the asset insured

from a reputable insurance

company.

Credit Risk of the Murabaha transaction can be mitigated by

conventional credit-risk mitigation procedures.


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Rollover in Murabaha

Rollover in Murabaha is not possible since each Murabahatransaction is for a particular asset. A new Murabaha can

only be executed for the purchase of a new asset.

Murabaha

Issues in Murabaha


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Rebate on early payments

Prohibited by Meezan Banks Shariah Supervisory Board since

it make the Murabaha transaction similar to conventional

debt.

Murabaha

Issues in Murabaha


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Can only be used for financing of assets, not operating

expenses.

Asset should be clearly specified.

Cannot be done for assets already purchased

Murabaha is a package of different contracts

The sequence of their execution is extremely important to

make the transaction halal.

Murabaha

Issues in Murabaha


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Murabaha transaction is the simplest from of an Islamic

Financial Transaction.

Murabaha can be used to finance the purchase of any assets

which is recognized as Mal-e-Mutaqawam (Valuable) under

Shariah.

A wide range of customer needs can be catered through

financing purchase of different assets by the customers.

Murabaha

Conclusion


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Meezan Bank has been using Murabaha to finance purchase of

raw material by its clients.

We have successfully entered into Murabaha transactions with

a number of clients. Some of them are:

Murabaha

Meezan Banks Experience

Client Transaction Volume (Rs. in Millions)

ICI 270

PSO 200

PARCO 100

Newage Cables 75

Sitara Chemicals 50

Murabaha Bankers Perspective

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