•Murabaha is a particular kind of sale where

the seller expressly mentions the cost of the

sold commodity he has incurred, and sells it

to another person by adding some profit or

mark-up thereon.

A simple sale in Arabic is called Musawamah - a sale without

disclosing or referring to the cost of goods sold

However when the cost price is disclosed to the client, it is

called Murabaha.

The distinguishing feature of Murabaha from ordinary sale is

- The seller discloses the cost to the buyer

- And a known profit is added

A simple Murabaha is one where there is cash payment and

Murabaha Muajjal is one on deferred payment basis.

In case of riba, lender of the money gets a specific interest on

the amount lended, after a specific time period, whereas the

principle retains in the ownership of the lender.

While in murabaha, there is no loan, instead one person sells a

commodity to other and the possession as well as the risk

transfers to the buyer, and the seller get his reward in the shape

of profit.

Combination of two contracts

Murabahah

Deferred sale

Two concepts

Combination of contracts.

Contingency of contracts.

Financing of purchasing commodities and goods from the local

markets

Financing import and export transactions

Financing fix assets (machines and equipments)

Financing of working capital (purchasing feedstock used for

production)

Financing construction and installations material purchases

Financing purchasing of real estate (land and building)

1-Promise stage.

2-Agency Contract

3-Delivery of Commodity

4-Contract Stage

Delivery of Commodity of to

Customer

6-payment of price in different

installments

Firstly, The client and the institution sign an over-all agreement whereby

the institution promises to sell and the client promises to buy

the commodity on an agreed ratio of profit added to the cost.

Agreement to Murabaha

Bank Client

Secondly, The institution appoints the client as his agent for purchasing the

commodity on his behalf and an agreement of agency is signed

by both the parties

Bank ClientAgreement to

Murabaha

Agency

Agreement

3-Delivery of

Commodity

Thirdly, The client purchases the commodity on behalf of the

institution and takes its possession as an agent of the institution,

and delivers it to the Bank. (Constructive or physically)

Bank vendor

clientTransfer of Risk Client purchases goods and takes possession

Contract Stage

Fourthly, The client makes an offer to purchase the commodity from the

institution, which will be accepted by institution.

client

Offer by client

Bank Client

Acceptance by Bank

Fifthly, The Commodity is delivered to the customer and the the

ownership as well as the risk of the commodity is transferred to

the client.

Bank Client

Commodity delivered&

Transfer of Title

Payment of Price in different

Installments

The most essential element of the transaction is that the

commodity must remain in the risk of the institution

during the period between the third and the fourth stage..

It is also a necessary condition for the validity of Murabahah

that they purchased from a third party. The purchase of the

commodity from the client himself on a buy agreement is not

allowed in the Shariah.

Also there must not be any prior relation b/w the

supplier and the customer

The abovementioned procedure of the Murabahah financing is

a complex transaction which the parties involved, have

different capacities different stages .

All these capacities must be kept in mind and must come into

operation with consequential effects each at its relevant stage

and these different capacities should never be mixed up

confused with each other.

Default Case:

In the event of default by the buyer (client) in respect of the

payment of the purchase price on the due date, the PRICE

cannot be increased. However, if he has undertaken in the

agreement to pay an amount for a charitable purpose, he shall be

liable to pay. & that must not be credited to the income of the

institution.

Rebates in Early Payment:

If the customer makes the payment before the due dateand there is no commitment that he would gain anydiscount in the price of Murabahah. Then it is permissiblefor bank to give any rebate to the client.

Documentation charges:The documentation charges may be charged to the both parties

Rollover in Murabahah:Rollover in Murabahah is not possible since each Murabahah

transaction is for a particular asset. A new Murabahah can only

be executed for the purchase of a new asset.

Purchase Evidence:The customer is required to submit purchase evidence and

declaration. The purchase evidence must confirm that customer

as an agent has purchase the goods after agency agreement