MURABAHAMURABAHAFINANCEFINANCE

A Presentation By:Abdul Baseer, Abdul Hannan, Syed Munawar Ali,

Waqar Hussain

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LEARNING OBJECTIVESLEARNING OBJECTIVES Conceptual understanding of Murabaha

Stages involved in Murabaha Transaction

Practical issues in Murabaha and their resolution

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DERIVATION OF MURABAHADERIVATION OF MURABAHA

The word “Murabaha” has been derived from the Arabic word “Ribah”, which has literary meaning of profit.

The Murabaha can be denoted as “Sale With Profit”.

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DEFINITION OF MURABAHADEFINITION OF MURABAHA  Murabaha is a particular kind of sale where Seller expressly mentions the cost it has incurred on purchase of the Asset(s) to be sold and sells it to another person by adding some profit, which is known to Buyer.

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WHAT IS SALE?WHAT IS SALE?

Sale is defined by the Islamic Scholars as follow:

“Exchange of a thing(subject matter) of value with another thing of value, with mutual consent”.

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COMPONENTS OF VALID SALECOMPONENTS OF VALID SALE

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SALE

CONTRACT SUBJECT MATTER

PRICE POSSESSION

FEATURES OF FEATURES OF MURABAHA MURABAHA Murabaha finance is not a loan given on interest, it is a sale of Asset(s) for cash/deferred price.

It is the obligation of the Seller to disclose the Cost and Profit to the Buyer.

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FEATURES OF FEATURES OF MURABAHAMURABAHA

Murabaha Finance can only be used for the purchase of fresh Asset(s) only.

Buy-Back arrangement is prohibited. This means that Murabaha transaction cannot be executed for the Asset(s) already purchased by the Customer.

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FEATURES OF FEATURES OF MURABAHAMURABAHAMurabaha Transaction can either be a cash sale (Spot Payment Murabaha) or a credit sale (Deferred Payment Murabaha) or a combination of both.

Payment of Murabaha Price can be made in lump sum or in installments or combination of both.

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FEATURES OF FEATURES OF MURABAHAMURABAHA

It is a fixed price sale and normally is done for short term.

The Murabaha Finance can be used to meet the working capital requirements. However, it cannot be used to meet the liquidity requirements.

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VARIOUSMODELS OF MURABAHA

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MODEL - ITWO PARTY REALTIONSHIPBank – Customer

MODEL - IITHREE PARTY RELATIONSHIP(Bank-Vendor) and Customer

MODEL - IIITHREE PARTY RELATIONSHIPBank and (Vendor-Customer)

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MODEL - IMODEL - IThe simplest possible Model emerges when the transaction involves two parties only, i.e Bank and the Customer.

The Bank is also vendor and sells the Asset(s) to its Customers on deferred payment basis.

From Shari’ah perspective it is an ideal Model and its profits are fully justified because Bank assumes all risks as Vendor/Trader. 13

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Bank/VendorCustomer

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MODEL I – GRAPHICAL PRESENTATIONMODEL I – GRAPHICAL PRESENTATION

MODEL - IIMODEL - IIIn most cases Murabaha Transaction involves a third party (i.e. Vendor) because Bank is not expected to engage in sale of variety of products required for variety of Customers.

The Bank directly deals with the Vendor and purchases the Asset(s).

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MODEL IIMODEL IIThe Bank sells the purchased Asset(s) to the customer on cost plus basis.

There are two distinct sale contracts at different point of times. First between Bank and Vendor and second between Bank and the Customer.

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17Customer Bank

Vendor

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2

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6

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MODEL II – GRAPHICAL PRESENTATIONMODEL II – GRAPHICAL PRESENTATION

MODEL II - PHASESMODEL II - PHASESPhase 1:

Customer identifies and approaches the Vendor or Supplier of the Asset(s) and collects all relevant information.

Phase 2:Customer approaches the Bank for Murabaha Financing and promises to buy the Asset(s).

Phase 3:The Bank makes payment to vendor directly. 18

MODEL II – PHASESMODEL II – PHASESPhase 4:

Vendor delivers the Asset(s) & transfers the ownership of Asset(s) to the Bank.

Phase 5:Bank sells the Asset(s) to Customer on cost plus basis and transfers ownership.

Phase 6: Customer pays Murabaha Price in lump sum or in installments on agreed dates. 19

MODEL III – BANKING MODEL III – BANKING MURABAHAMURABAHA

This Murabaha Model is mostly practiced model in Banking now a days and therefore we will look at it in more detail.We will also look at the documentation required at different stages of the transaction.

It is also a three-party structure but it is bit complicated than previous ones.20

MODEL III – BANKING MODEL III – BANKING MURABAHAMURABAHA

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 .

It is called Murabaha to the Purchase Orderer .

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MODEL III – BANKING MODEL III – BANKING MURABAHAMURABAHA

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 SHARIA’H COMPLIANT.

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BankCustomer

Vendor4

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MODEL III – GRAPHICAL PRESENTAIONMODEL III – GRAPHICAL PRESENTAION

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1

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6Offer Acceptance

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PHASE I – PROMISE TO PURCHASE AND PHASE I – PROMISE TO PURCHASE AND SELLSELL

The Customer approaches the Bank for Murabaha Finance and promises to purchase the Asset(s) from the Bank which, the Customer will purchase as an Agent of the Bank.

Master Murabaha Finance Agreement (MMFA) shall be signed by the Bank and the Customer at this stage. This is basically a Memorandum of Understanding between two parties.

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PHASE II – APPOINTMENT OF PHASE II – APPOINTMENT OF AGENTAGENT

In the absence of expertise required to purchase particular kind of Asset(s), the Bank appoints Customer as its Agent to buy Asset(s) on its behalf

Types of Agency Agreement

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•Global Agency•Specific Agency

ON ASSET BASIS ON TIME BASIS

•Limited Period•Open Ended

PHASE II – APPOINTMENT OF PHASE II – APPOINTMENT OF AGENTAGENT

The appointment of an Agent for purchase of Asset(s) for and on behalf of the Bank and the ultimate sale of such Asset(s) to the Customer shall be independent transactions of each other and separately documented.

However, according to Sharia’h perspective, it is preferable to appoint the Agent other than the Customer.

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PHASE II – APPOINTMENT OF PHASE II – APPOINTMENT OF AGENTAGENTAgency Agreement is not the condition of the Murabaha if the institution can make direct purchases from the supplier.

It is advisable to execute Agency Agreement because financial institution does not have the expertise to identify the Asset(s) and negotiate an efficient price. 27

Thank You

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