murabaha final presentation

MURABAHA(GROUP 3)

PRESENTED BY:• SONIA MOBEEN (6439)• FAREHA AHMED (6432)• WAJEEHA PERVEZ (6197)• SIKANDER KHAN (5390)• NAVEED AHMED SIDDIQUI (0722)

CONTENT• INTRODUCTION• DEFINITION• DIFFERENCE B/W MURABAHA & MUSAWAMAH.• BASIC RULES OF SALES• BAI ‘ MU’AJJAL• EVIDENCE• MODE OF FINANCING• BASIC FEATURES• ISSUES• MISTAKES• CONCLUSION

MURABAHA• Murabaha is a particular kind of sale where

the seller expressively mentions the cost of the commodity purchased, and sells it to another person by adding some profit thereon.

• Thus, Murabaha is not a loan given on interest• It is a sale of a commodity for cash/deferred

price.

DIFERENCE B/W MURABAHA AND MUSAWAMAH

MURABAHA MUSAWAMAHIts a particular kind of sale where the seller discloses its cost & profit charged.

It is a sale on agreed price without referring to the first price on which the seller has purchased.

BASIC RULES OF SALES• The subject of sale must exist.

• The subject of sale must be in the ownership.

• The subject of sale must be in the physical or constructive possession.

• The sale must be instant and absolute.

• The subject of sale must be a property of value.

• In Islamic finance, the sale of things that are not allowed in Islam, for instance wine, are also void sales. -

• The subject of sale must be known and specifically identified to the buyer.

• The delivery of the sold commodity to the buyer must be certain

• The price must be certain at the time of transaction.

• Price cannot be set upon the contingency of some future event. It must be absolute at the time of sale.

All these basic rules of sales are important for

the validation of MURABAHA TRANSACTION

Bai’ Mu’ajjal(sale on deferred Payment basis)• Bai-Mu'ajjal may be defined as a contract

between a buyer and a seller under which the seller sells certain specific goods (permissible under Islamic Shariah and the Law of the country), to the buyer at an agreed fixed price payable at a certain fixed future date in lump-sum or within a fixed period by fixed .

Bai’ Mu’ajjal(sale on deferred Payment basis)

EXAMPLE:if the current cost of a bag of fertilizer to the bank is Rs. 50, the bank may sell it through its agent to farmers needing bank finance at Rs. 55 subject to actual payment of this price after an agreed period. The bank would, however, pay Rs. 50 to its agent prior to or immediately after the supply of the fertilizer by the agent under its instructions.

EVIDENCE

EVIDENCE• MURABAHA IS A CONTRACT

IN ISLAM

• MAJORITY OF SAHABAH,IMAM OF MAZHAB CONSIDER MURABAHA AS A PERMISSIBLE CONTRACT BASED ON ISLAM

PILLERS• SELLER• BUYER• PRICE• MERCHANDISE OR GOODS• SIGHAH (IJAB)AND ACCEPTANCE (QABUL)

MODE OF FINANCING OF MURABAHA

SUPPLIERS OF GOODS ISLAMIC BANK CUSTOMER

PAYMENT OF

PURCHASE PRICE

PAYMENT OF

PURCHASE

PRICE + PROFIT

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

Agreement to Murabaha

Bank Client

2. Client appointed as agent to purchase goods on bank’s behalf Agency Agreement

Bank ClientAgreement

to Murabaha

Agency Agreement

3. Bank gives money and issue purchase Order to client for purchase of goods

AGREEMENT TO MARABAHA

Bank Client

Agency Agree-ment

Disbursement to the client

4. Client purchases goods on bank’s behalf and

takes their possession.Client purchases goods and takes possession

Transfer of Risk Vendor

Bank Client

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

Offer to purchase

Bank Client

6. Client pays agreed price to bank according to an agreed schedule. Usually on a deferred payment basis Bai’ Mu’ajjal

Bank ClientPayment of Price

7. Bank accepts the offer(declaration submitted by the

client) and sale is concluded.

Murabaha Agreement +

Transfer of Title

Bank Client

'buy-back' agreement• It is also a necessary condition for the validity

of murabahah that the commodity is purchased from a third party. The purchase of the commodity from the client himself on a buy back agreement is not allowed in the Shariah. Thus murabahah based on 'buy-back' agreement is nothing more than an interest-based transaction.

ISSUES OF MURABAHA

1. Securities against Murabahah

Payments coming from the sale are receivables and for this, the client may be asked to furnish a security. It can be in the form of a mortgage or hypothecation or some kind of lien or charge.

2. Guaranting the Murabahah• The seller can ask the client to furnish a 3rd party guarantee. In case

of default on payment the seller may have recourse to the guarantor who will be liable to pay the amount guaranteed to him.

• There are two issues relating to this:

• a) The guarantor cannot charge a fee from the original client. The reason being that a person charging a fee for advancing a loan comes under the definition of riba

• b) However the guarantor can charge for any documentation expenses.

3. Penalty of default • Another issue with Murabahah is that if the client defaults in

payment of the price at the due date, the price cannot be changed nor can penalty fees be charged.

• In order to deal with dishonest clients who default in payment deliberately, they should be made liable to pay compensation to the Islamic Bank for the loss suffered on account of default.

• However these should be made subject to the following conditions: a) The defaulter may be given a grace period of at-least one-month.

b) If it is proven beyond doubt that the client is defaulting without valid excuse then compensation can be demanded.

4.Rollover in Murabahah

Murabahah transaction cannot be rolled over for a further period as the old contract ends. It should be understood that Murabahah is not a loan rather the sale of a commodity, which is deferred to a specific date. Once this commodity is sold, its ownership transfers from the bank to the client and it is therefore no more a property of the seller. Now what the seller can claim is only the agreed price and therefore there is no question of effecting another sale on the same commodity between the same parties.

5.Rebate on earlier payments

• Sometimes the debtors want to pay early to get discounts.

• However in Islam, majority ofMuslim Scholars including the major schools of thought consider this to be un-Islamic. However if the Islamic bank or financial institution gives somebody a rebate on its own, it is not objectionable especially if the client is needy

6. Calculation of cost in Murabahah

• The Murabahah can only be effected when the seller can ascertain the exact cost he has incurred in acquiring the commodity he wants to sell. If the exact cost cannot be ascertained then Murabahah cannot take place. In this case the sale will take place as Musawamah

i.e. sale without reference to cost.

7. Subject matter of the sale

All commodities cannot be the subject matter in Murabahah because certain requirements need to be fulfilled. The shares of a lawful company can be sold or purchased on Murabahah basis because according to the principles of Islam the shares represent ownership into assets of the company provided all other basic conditions of the transaction are fulfilled. A buy back arrangement or selling without taking their possession is not allowed at all.

8.DIFFERENT PRICING FOR CASH AND CREDIT SELLS

9.THE USE OF INTEREST RATE AS BENCHMARK

10.PROMISE TO PURCHASE

MISTAKES OF MARABAHA FINANCING

1. The most common mistake is to assume that Murabahah can be used for all types of transactions and financing. This mode can only be used when a commodity is to be purchased by the customer. If funds are required for some other purpose Murabahahcannot be used.

• 2. The document is signed for obtaining funds for a specific commodity and therefore it is important to study the subject matter of the Murabahah

• 3. In some cases, the sale of commodity to the client is affected before the commodity is acquired from the supplier.

• This occurs when the various stages of the Murabahah are skipped and the documents are signed all together.

It is to be remembered that Murabahah is a package of different contracts and they come into play one after another at their respective stages.

• 4. It is observed in some financial institutions that Murabahah is applied on already purchased commodities, which is not allowed in Shariah and can be effected on not yet purchased commodities.

CONCLUSION

• Murabaha is not a mode of finance it’s a sale on cost plus basis

• The concept of deferred payment device to use as a mode of financing only in case where:

o Client indent to purchase a commodityo No Murabaha sale can be effective on overhead expense, payments

of bills ,settlement of debt and purchase of currencies o The subject matter of sale should be in the possession of the seller

either constructive or physicalo The seller i.e. Bank can make his purchaser i.e. Client his agent

under the agency contract between themo Once the price is locked it cannot be changed or increased .

• Murabaha transaction should be carried out in a prescribed way because it have a slight difference with the interest based loan procedure

THANK YOU

QUESTIONS???