2. 2
Committed to you
Definition
• Murabaha:
–It is a form of sale where goods has been
sold on definite contract price with
complete discloser of cost and profit to
the buyer. Murabaha sale may be spot or
deffered.
3. 3
Committed to you
Murabaha in Islamic Banking
• 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.
• Murabaha in Islamic Banking is that Bank purchases or
authorizes the customer to purchases goods on bank’s behalf
upon request of customer and his promise to buy that goods
from Bank and then Bank sells these goods to customer on
Murabaha basis. It is called Murabaha to the purchase
orderer.
4. 4
Committed to you
Murabaha in Islamic Banking
• Features of Murabaha in Islamic
Banking:
– This transaction is concluded with a prior promise to
buy, submitted by a person interested in acquiring
goods through the institution.
– It is a bunch of contracts completed in steps and
ultimately suffices the financial needs of the client.
– The sequence of execution of contracts is extremely
important to make the transaction Shariah compliant.
5. 5
Committed to you
Scope of Murabaha
• A general misconception is that Murabaha can be
used for financing all type of assets.
• As it is a kind of sale, there must be a seller and
buyer and some thing that is bought and sold . The
institution is the seller and the client is the buyer.
• It is a fixed price sale and normally used for short
term financing.
• It cannot be used as a substitute for running finance
facility, which provides cash for fulfilling various
needs of the client.
6. 6
Committed to you
Conditions for Shariah Compliant Transaction
• Murabaha transaction can not be done in goods that are not permissible in
Shariah.
• Both Sale must fulfill all Shariah Rulings regarding the sale contract.
• Goods must not be consumed before offer and acceptance of 2nd sale.
• Goods must be transferred from Seller to Bank’s Possession before 2nd sale.
• Original seller and customer must be different parties and do not have
ownership relationship.
• Bank must disclose the cost to the customer and certain amount of profit
included into selling price.
• A contract must not have condition to the next contract.
7. 7
Committed to you
Process Description of Murabaha Financing
1. Client approaches the bank for facility through Murabaha
(FAL).
2. Client and bank sign an agreement to enter into Murabaha
(MMFA).
3. Client appointed as agent to purchase goods on bank’s behalf
(When Needed).
4. Bank gives money to agent/supplier for purchase of goods
or may make direct payment to vendor (Direct / Indirect
payment).
5. The agent takes possession of goods on bank’s behalf.
6. Agent makes a confirmation to the bank through a
declaration that it has purchased the specified goods and has
not consumed / resold it.
8. 8
Committed to you
Process Description of Murabaha Financing
7. Client makes an offer to purchase the goods
from bank through a Murabaha Contract and
Bank accepts the offer and sale is concluded.
8. Client pays agreed price to bank according to an
agreed schedule (Payment Schedule). Usually on a
deferred payment basis (Bai Muajjal).
9. 9
Committed to you
Process Description of Murabaha Financing
• Client approaches the bank for facility through
Murabaha (FAL).
Bank Client
Facility
Approved
10. 10
Committed to you
Process Description of Murabaha Financing
• Client and bank sign an agreement to enter into
Murabaha (MMFA).
Master
Agreement to
Murabaha
Bank Client
11. 11
Committed to you
Process Description of Murabaha Financing
• Client appointed as agent to purchase goods on
bank’s behalf (When Needed).
Agency
Agreement
Agreement to
MurabahaBank Client
12. 12
Committed to you
3. Bank gives money to agent/supplier for purchase of goods or may
make direct payment to vendor (Direct / Indirect payment).
Disbursement to the agent or supplier
Agency
Agreement
Supplier
Agreement to
Murabaha
Bank Client
Process Description of Murabaha Financing
13. 13
Committed to you
Process Description of Murabaha Financing
4. The agent takes possession of goods on bank’s
behalf.
Transfer of Risk
Delivery of
goodsVendor
Bank Agent
14. 14
Committed to you
Process Description of Murabaha Financing
5 (a). Agent makes a confirmation to the bank
through a declaration that it has purchased the
specified goods and has not consumed / resold it.
Declaration
Bank Agent
15. 15
Committed to you
Process Description of Murabaha Financing
5(b). Client makes an offer to purchase the goods from bank
through a Murabaha Contract and Bank accepts the
offer and sale is concluded.
Murabaha Contract
+
Transfer of Title
Bank Client
16. 16
Committed to you
Process Description of Murabaha Financing
6. Client pays agreed price to bank according to an
agreed schedule (Payment Schedule). Usually on a
deferred payment basis (Bai Muajjal).
Payment of PriceBank Client
17. 17
Committed to you
Process Flow for Murabaha
• Each Murabaha Transaction must be executed
through following stages:
– Promise Stage
– Agency Stage
– Acquiring Possession
– Execution of Murabaha
– After Execution of Murabaha
18. 18
Committed to you
Process Flow for Murabaha
1. Promise Stage
A. Credit Approval
– Check that the transaction between two parties must be
genuine , not fictitious.
– The Institution must insure that the party from whom the
item is bought is a third party and not the customer or his
agent.
19. 19
Committed to you
Process Flow for Murabaha
B. Shariah Process Flow
– Shall be prepared by Business
– Shall describe
• complete process of transaction
• nature of assets (assets should be in line with financing
approval).
• Method of payment (i.E. In bullet or trenches/through
DD/PO/RTGS or in client account)
• Financing terms if any
• Main suppliers in market
• Size of purchases
20. 20
Committed to you
Process Flow for Murabaha
– SPF shall also describe:
• Normal consumption time and
• Goods verification requirements at the time of declaration.
– The process flow will also give details of any supplier which is a related
party.
– Business will get the approval of Shariah department and will send to CAD
and COD.
C. Murabaha Facility Agreement to be signed by both
Parties. It includes:
– Mentioning Limits of each facility
– Security to be submitted by the Customer
– Other terms and conditions covering all the facilities approved for the
Customer.
21. 21
Committed to you
Process Flow for Murabaha
D. Purchase Requisition
– The Client orders the institution to buy certain goods for
him and sell him the same after acquiring.
– Containing the details of the goods required to purchase
from the Supplier, Cost Price and expected date of
delivery
– The prerequisite is that the goods are not already owned
by the client.
E. Promise to Purchase
– At this stage the customer promises the institution to buy
the goods which were acquired by the institute on his
request.
22. 22
Committed to you
Process Flow for Murabaha
2. Agency Stage
Agency Agreement is not the condition of the Murabaha if the
institution can make direct purchases from the supplier.
The financial institution, does not have the expertise to identify
the goods and negotiate an efficient price.
The institution therefore appoints customer as its Agent
(which is also permissible), in the first step of the transaction,
to identify and procure the goods on institution behalf.
This is done by execution of Agency Agreement between the
institution and the customer.
However according to Sharia Perspective it is preferable to
appoint the Agent other then customer.
23. 23
Committed to you
Process Flow for Murabaha
Payment for Murabaha Goods by Bank
– In principle payments for the procurement of goods for
onward Murabaha sale to the customer will be made
directly to the supplier. However in certain circumstances it
becomes impossible or difficult to make direct payment. In
all such cases with valid justification and with the approval
of RSBM, indirect payment for Murabaha may be allowed.
24. 24
Committed to you
Process Flow for Murabaha
3. Acquiring Possession
– Institution must take actual or constructive possession of the
item.
• The forms of taking delivery or possession of items differ
according to their nature and customs.
• The item must move from the responsibility of the supplier
to the responsibility of the institution .
• It is obligatory that the point when the risk of the item is
passed on by the institution to the customer, be clearly
identified.
– It is advisable that bank should appoint one person for
physical inspection.
25. 25
Committed to you
Process Flow for Murabaha
4. Execution of Murabaha
– Goods must exists at the time of execution of Murabaha.
– The Customer will make an offer to purchase the goods
acquired by him for Bank’s behalf mentioning the Offer Price.
(Comprising Cost plus Bank’s Profit )
– The Bank will accept the offer made by the Customer. All the
terms of the Murabaha Transaction such as Sale Price ( Cost
plus Profit ) Due Date or Schedule of Payments etc. must be
mentioned in the Bank’s Letter of Acceptance.
– At this stage relation of a Buyer & Seller comes into operation
between the institution & the client.
– Since the sale is effected on deferred payment basis, the relation
of Debtor and Creditor also emerges between them
simultaneously.
26. 26
Committed to you
Process Flow for Murabaha
5. After Execution of Murabaha:
– Customer will pay the price as per schedule of payment.
28. 28
Committed to you
Practical Issues in Murabaha
• Rebate on Early Payment
– If the customer makes early payment, the institution
has the sole discretion in allowing them the rebate.
Such rebate should not be the condition for early
payment.
– It is not recommended to make it a practice and must
be avoided in normal course of business. Such issue,
if arises, should be brought in the knowledge of
Shariah advisor
29. 29
Committed to you
Practical Issues in Murabaha
• Penalty on Late Payment
• As soon as the Murabaha is executed, the Murabaha
price becomes a receivable (Dayn) for the Bank.
Hence, any amount charged over and above the
“dayn” amount will be Riba.
• However, it is permissible to have an undertaking
from the customer to pay an amount of money or a
percentage of the debt to be donated to charitable
causes in the event of delay in payment/installments.
30. 30
Committed to you
Practical Issues in Murabaha
• Buy Back in case of Group Companies
– Bank is purchasing the goods from one company
and selling to the other company but since the
ownership is common so it is deemed as a buy
back transaction; where goods are purchased
from one person for the purpose of selling it back
to the same at a different price.
31. 31
Committed to you
Practical Issues in Murabaha
• Profit Recognition
– Generally in Murabaha transaction there are two
stages:
• Investment Stage (Agency to Purchase)
• Financing Stage (Declaration/Murabaha Contract
to payment)
– The profit for the Murabaha transaction can be
recognized after the goods are sold by the bank to the
customer.
32. 32
Committed to you
Practical Issues in Murabaha
• Rollover in Murabaha
– Murabaha Transaction must be executed on a particular asset.
– Two Murabaha Facility can not be obtained on same asset and
at the same time.
• Process of Murabaha differ from product to product
– Application of Murabaha is not simple for all products.
– Its application differs from products to products like Sugar
cane, Shares, Leather, Cotton, Gas, Petrol.
