Introduction to Murabaha

Sharia Compliant modes of Islamic Banking & Finance

Participatory Modes Trading ModesDebt based

Mode

Qard • Mudaraba• Musharakah• Diminishing Musharakah• Equity Participation in theform of shares in a corporate entity

• Ijara• Murabaha• Musawamah• Salam• Istisna• Tawarruq (in exceptionalcases with prior approval from SBP)

Other Modes

• Wakalah• Hawala• Kafala

Goods can only be sold on the price mentioned herein

Musawamah Murabaha Tawlliyah Wazia

Buyers Knows

In Murabaha

In Tawliya

In Wazia

Nothing About Cost

& Profit

Cost andZero Profit

Cost and Loss

Cost and Profit

In Musawamah

• Murabaha is a particular kind of sale and not a financing in its origin.

• 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.

Definition of Murabaha

• The distinguishing feature of Murabaha from ordinary sale is:

- The seller discloses the cost to the buyer.

- And a known profit is added.

Murabaha

• Payment of Murabaha price may be:

1) At spot2) In installments3) In lump sum after a certain time

• Hence, Murabaha does not necessarily imply the concept of deferred payment.

Murabaha

Basic rules for Murabaha financing:

• Asset to be sold must exist.

• Sale price should be determined.

• Sale must be unconditional.

• Assets to be sold: a) Should not be used for un-Islamic purpose.

b) Should be in ownership of the seller at the time of sale; physical or constructive.

Murabaha

Basic rules for Murabaha financing:

• Re- negotiation of price and roll over of Murabaha are not permitted.

• Discounting of Murabaha instruments is not permitted.

Murabaha

Step by step Murabaha Financing

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

Agreement to Murabaha

Bank Client

Murabaha

Institute may require Hamish Jidyah (Security deposit)

Hamish Jiddiyah (Security Deposits): Purpose

Client refuses to buy

Bank resells it to other Person

New Price is above than

Cost of Purchase

New Price is same as cost of Purchase

New Price is lowerthan the Cost of

Purchase

Full Hamish Jiddiyah

is returned

Full Hamish Jiddiyah

is returned

Refund Hamish Jiddiyah after deducting

the actual loss or Claim further if

loses are not covered

When Customer refuses to

buy

Hamish Jiddiyah

Cost of Purchase of

GoodsMark Up

Resale Price

Setoff Hamish Jiddiyah

Refund Hamish Jiddiyah

Further Claim from Customer

Case-1 15,000 40,000 5,000 35,000 5,000 10,000 -

Case-2 15,000 40,000 5,000 25,000 15,000 - -

Case-3 15,000 40,000 5,000 50,000 - 15,000 -

Case-4 15,000 40,000 5,000 18,000 15,000 7,000

Before Murabaha if customer refuses to buy

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

Agency

Agreement

Agreement to Murabaha

Bank Client

Murabaha

3. Bank gives money to agent/supplier for purchase of goods.

Disbursement to the agent or supplier

Agency

Agreement

Supplier

Agreement to Murabaha

Bank Client

Murabaha

4. The agent takes possession of goods on bank’s behalf.

Transfer of Risk

Delivery of goods Vendor

Bank Agent

Murabaha

5(a). Client makes an offer to purchase the goods from bank through a

declaration.

Offer to purchase

Bank

Client

Murabaha

5(b). Bank accepts the offer and sale is concluded.

Murabaha Agreement +

Transfer of Title

Bank Client

Murabaha

6. Client pays agreed price to bank according to an agreed schedule. Usually on a deferred payment basis (Bai Muajjal)

Payment of Price Bank

Client

Murabaha

Cases / Examples

MURABAHA• Actual buyer has a few funds/ No Funds• Financer buys for Actual Buyer:-

Cost Rs. 100,000 Paid by Financer

Buying Expenses 10,000 Paid by Financer

Total Cost 110,000 Borne by Financer

Profit rate on cost 20%

Price to be offered 110,000 + (20% of

110,000)=132,000

Recovery in installments from buyer

Example (1)

• Mr.A purchased a pair of shoes for Rs. 100.

• He wants to sell it on murabahah with 10% markup.

• The exact cost is known.

• The murabahah sale is valid.

Example (2)• Mr. A purchased a ready-made suit with a pair of

shoes in a single transaction, for a lump sum price of Rs. 500/-

• Mr.A can sell the suit including shoes on murabahah.

• But he cannot sell the shoes separately on Murabahah, because the individual cost of the shoes is unknown.

• If he wants to sell the shoes separately, he must sell it at a lump sum price without reference to the cost or to the mark-up.

Application of Murabaha

• Purchase of raw material; for meeting

working capital needs of trade and industry.

• Medium term requirements for purchase of

land, building and equipment.

• Trade finance products including imports,

exports and bill purchase.

Applications of Murabaha

FAQs:• Q. Is it necessary in Murabaha to disclose cost of

commodity to be sold by the seller (bank)?

• Ans. Yes

• Q. Is it a loan Agreement?

• Ans. No, it is a sale of commodity for cash or on deferred price.

• Q. How Murabaha transaction is made?• Ans. Bank will buy the goods from third party and

sell those goods to the customer for a pre-agreed price.

• Q. Can bank appoint customer as an agent to purchase goods as per his choice?

Ans. Yes. Customer may be appointed by bank as an agent for purchase of goods but this agreement of agency will be made separately from the Murabaha.

• Q. Who will be responsible for the risk during purchase of the commodity and its ultimate sale to the client?

• Ans. Financer will be responsible.

• Q. In case of late payment from buyer, Can bank take penalty from buyer?

• Ans. Yes

• Q. Can the bank use the amount of penalty for its own purpose?

• Ans. No, penalty shall be used for charitable purpose.

• Q. Can bank take security from buyer?• Ans. Yes

• Q. In Case of default of buyer, Can bank sale the security without the intervention of court?• Ans. Yes

Agency- FAQsWhat is the meaning of appointment of customer as an

agent?

When the actual buyer comes to bank and ask that he wants to buy goods but he does not have money in his pocket. Further the Bank is unable to reach to the destination of Seller.

The bank request to buyer to buy goods on Bank's behalf.

When buyer buys then bank sells the goods to buyer on installment.

Appointment of Customer as agent is preferable ?

• It should be avoided but when the situation makes it inevitable then appointment is not prohibited.

• When the Financer appoints the customer as agent?

• Ans. Generally customers are living far from financer, the financer appoints him as agent and say to buy goods on our behalf.

The Customer buys and pay to supplier on the behalf of Financer.

Now the Financer sell to customer by adding profit on installments.

Buy Back

• If a person has a fixed asset of Rs. 1000,000; he sell it to bank; and request to bank to sell the assets again to him on installments; and he will pay 1,200,000.

Ans. No. It is a buy back arrangement and it is haram.