3. 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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4. 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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5. 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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6. COMPONENTS OF VALID SALECOMPONENTS OF VALID SALE
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SALE
CONTRACT SUBJECT
MATTER
PRICE POSSESSION
7. FEATURES OF MURABAHAFEATURES OF 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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8. FEATURES OF MURABAHAFEATURES OF MURABAHA
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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9. FEATURES OF MURABAHAFEATURES OF MURABAHA
Murabaha 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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10. FEATURES OF MURABAHAFEATURES OF MURABAHA
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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12. MODEL - I
TWO PARTY REALTIONSHIP
Bank – Customer
MODEL - II
THREE PARTY RELATIONSHIP
(Bank-Vendor) and Customer
MODEL - III
THREE PARTY RELATIONSHIP
Bank and (Vendor-Customer)
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13. MODEL - IMODEL - I
The 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
15. MODEL - IIMODEL - II
In 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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16. MODEL IIMODEL II
The 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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18. MODEL II - PHASESMODEL II - PHASES
Phase 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
19. MODEL II – PHASESMODEL II – PHASES
Phase 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
20. MODEL III – BANKING MURABAHAMODEL III – BANKING MURABAHA
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.
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21. MODEL III – BANKING MURABAHAMODEL III – BANKING MURABAHA
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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22. MODEL III – BANKING MURABAHAMODEL III – BANKING MURABAHA
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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24. PHASE I – PROMISE TO PURCHASE ANDPHASE 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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25. PHASE II – APPOINTMENT OF AGENTPHASE II – APPOINTMENT OF AGENT
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
26. PHASE II – APPOINTMENT OF AGENTPHASE II – APPOINTMENT OF AGENT
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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27. PHASE II – APPOINTMENT OF AGENTPHASE II – APPOINTMENT OF AGENT
Agency 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.
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