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Sale Contract /Murabaha .

Muhammad Najeeb KhanMuhammad Najeeb Khan

CONTRACT IN ISLAM

CONTRACT

SUBJECT MATTER

CONTRACTORS WORDING OFCONTRACT

•Specified •Quantified

•Non-restricted•Sane•Mature

•Present•Unconditional•Non-contingent

Law of Contract

Islamic Contract: It is connection between the offer and the acceptance in a manner that results the proper affects.

OfferAcceptanceSubject matter

ISLAMIC SALE

DEFINITION OF SALE(BAI)

– exchange of a thing of value with another

thing of value with mutual consent.

– the sale of a commodity in exchange of

cash.

ISLAMIC SALE

(1)-VALID SALE ( Bai Sahih)

– a sale is valid if all elements together with their conditions are present

– elements of valid sale are• Contract ( Aqd )• Subject matter ( Mabe’e)• Price ( Thaman )• Possession or delivery ( Qabza )

CONTRACT ( Aqd )

• Offer & Acceptance ( Ijab-o-Qobool)– Oral ( Qauli )– Implied ( hukmi )

• Buyer and seller ( Muta’aquadeen ) must be– Sane– Mature

• Conditions of contract ( Sharaet-e-Aqd )– sale must be non-contingent

– sale must be immediate

SOLD GOOD OR SUBJECT MATTER ( Mube’e )

• Existing

• Valuable

• Usable

• Capable of ownership/title

• Capable of delivery/possession

• Specific & Quantified

• Seller must have title & risk

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MURABAHAMURABAHA

Murabaha is a particular kind of sale where the seller discloses its cost and profit charged thereon.

The price in this sale can be both on spot and deferred.

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Difference between Difference between Murabaha & MusawimaMurabaha & Musawima

• Murabaha is a particular kind of sale where the seller discloses its cost and profit charged thereon .

• Musawima is a sale on agreed price without referring to the first price on which the seller has purchased

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BANKING MURABAHABANKING MURABAHAIt is a contract wherein the institution, upon request by the customer, purchases a asset from the third party usually a supplier/vendor and resells the same to the customer either against immediate payment or on a

deferred payment basis.

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BANKING MURABAHA

It is called Murabaha to the purchase orderer .

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 Shariah compliant.

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SCOPE OF MURABAHASCOPE OF MURABAHA

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 buyer.It cannot be used as a substitute for running finance facility , which provides cash for fulfilling various needs of the client.

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SCOPE OF MURABAHA

It is a fixed price sale and normally is done for short term.

The transaction can be used in order to meet the working capital requirements however it cannot be used to meet liquidity requirements.

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Step by Step Murabaha

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Stage One (a) for Murabaha financing

1. Client approach the bank for facility through Murabaha.

1- Promise stage1- Promise stage

Facility approved

Bank Client

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Stage One (b) for Murabaha financing

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

1- Promise stage1- Promise stage

Murabaha Facility

Agreement

MOU

Bank Client

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Stage One (c) for Murabaha financing

. Client submit the purchase requisition to the bank.

1- Promise stage1- Promise stage

purchase

requisition

/Promise to the

bank.

Bank Client

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2. Client appointed as agent to

purchase goods on bank’s behalf

2- Agency stage 2- Agency stage

Agency

Agreement

Bank ClientAgreement to

Murabaha

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. Bank gives money to supplier

through client’s account for

purchase of goods.

2- Agency stage 2- Agency stage

Stage Two for Murabaha financing

Agreement to Murabaha

Agency Agreement

Disbursement to the Supplier

Islamic Bank Bank

Client

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. Client purchases goods on bank’s

behalf and takes their possession.

3. Acquiring PossessionStage three for Murabaha financing

Client purchases goods and takes possession

Transfer of Risk Vendor

Bank Client

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. Client makes an offer to

purchase the goods from bank.

4. Execution of Murabaha

Stage four (a) for Murabaha financing

Offer to purchase

Bank Client

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. Bank accepts the offer and

sale is concluded.

4. Execution of Murabaha

Stage four (b) for Murabaha financing

Murabaha Agreement

+ Transfer of Title Bank Client

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. Client pays agreed price to bank

according to an agreed schedule.

Usually on a deferred payment

basis (Bai Muajjal)

4. Execution of Murabaha

Stage four (b) for Murabaha financing

Payment of Price Bank Client

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MurabahaMurabahaGENERAL MECHANICS

CUSTOMER

ISLAMIC

BANK

AgreementVENDOR

• The customer approaches the Bank with the request for financing

• The Bank purchases and receives title of ownership from the vendor

• The Bank makes payment to the vendor

• The Bank transfers the title over to the customer upon payment

• The customer makes payment up-front or on a deferred basis

• The customer approaches the Bank with the request for financing

• The Bank purchases and receives title of ownership from the vendor

• The Bank makes payment to the vendor

• The Bank transfers the title over to the customer upon payment

• The customer makes payment up-front or on a deferred basis

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STAGES OF MURABAHA

11. Promise Stage. Promise Stage

2. Agency Stage2. Agency Stage

3. Acquiring Possession 3. Acquiring Possession

4. Execution of Murabaha 4. Execution of Murabaha

5. After Execution of Murabaha 5. After Execution of Murabaha

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STAGES OF MURABAHA

PRIOMISE STAGE A- CREDIT APPROVAL

(under Shariah perspective)

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CREDIT APPROVALCREDIT APPROVAL

(under Shariah perspective) (under Shariah perspective)

Points to Be Considered While Approving Credit

It is essential that the transaction between two parties must be genuine , not fictitious.

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CREDIT APPROVAL (under Shariah perspective)

Points to Be Considered While Approving Credit

The Institution must insure that the party from whom the item is bought is a third party and not the customer customer or his agentagent . In this manner the transaction can be saved from Bai Inah (Buy Back)Bai Inah (Buy Back) which is not allowed in sharia.

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STAGES OF MURABAHA

PRIOMISE STAGE B- Murabaha Facility Agreement

MOU

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Murabaha Facility Agreement

MOU Mentioning Limits of each facility Security to be submitted by the

Customer Other terms and conditions

covering all the facilities approved for the Customer.

The Agreement to be signed by both the parties.

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Securities Against Securities Against Murabaha Price Murabaha Price

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STAGES OF MURABAHA

PRIOMISE STAGE PRIOMISE STAGE

C- C- Purchase RequisitionPurchase Requisition

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C- C- Purchase RequisitionPurchase 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.

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STAGES OF MURABAHA

PRIOMISE STAGE PRIOMISE STAGE

D- D- Promise to PurchasePromise to Purchase

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D- Promise to Purchase

At this stage the customer promises the institution to buy the goods which were acquired by the institute on his request. Normally Purchase requisition contains this Promise.

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STAGES OF MURABAHA

PRIOMISE STAGE PRIOMISE STAGE G- G- PAYMENT OF MURABAHA PAYMENT OF MURABAHA

GoodsGoods

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G- G- PAYMENT OF PAYMENT OF MURABAHA GoodsMURABAHA Goods

Advance payment can be made to the supplier.

It is advisable that Murabaha payment to be made directly to the supplier by the bank.

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STAGES OF MURABAHASTAGES OF MURABAHA

2-AGENCY STAGE2-AGENCY STAGE

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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.

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AGENCY STAGEAGENCY STAGE

The customer, however, being in the industry, can do this.

The institution therefore appoints him as its Agent (which is also permissible), in the first step of the transaction, to identify and procure the goods on institution behalf.

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AGENCY STAGEAGENCY STAGE

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.

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AGENCY STAGE

If goods are acquired from third party the execution of agency agreement will be between the institution & the third party..

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AGENCY STAGE

TYPES OF AGENCY AGREEMENT

1. SPECIFIC AGENCY AGREEMENT When the purchase of commodity is not ofconsistent nature.

2. GLOBAL AGENCY AGREEMENT When the purchase of commodity is of consistent nature.

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STAGES OF MURABAHASTAGES OF MURABAHA

3-ACQUIRING POSSESION3-ACQUIRING POSSESION

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Acquisition Of Title & Possession of The Asset

1-Institution must take 1-Institution must take actual or constructive actual or constructive possession of the possession of the item .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.

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Acquisition Of Title & Possession of The Asset

2.Goods must exists at the time of execution of Murabaha.

If the above two are not fulfilled than the institution cannot execute Murabaha.

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Acquisition Of Title & Possession of The Asset

Documentary evidence required at the time of possession before execution of Murabaha i.e. delivery challan, gate passes and sales tax invoices.

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Physical Inspection

Importance of Physical Inspection.It is advisable that bank should appoint one person for physical inspection .Importance of Physical Inspection

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STAGES OF STAGES OF MURABAHAMURABAHA

4- EXECUTION OF MURABAHA

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Actual Murabaha SaleActual Murabaha Sale

OFFER & ACCEPTANCEOFFER & ACCEPTANCE

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OFFER TO PURCHASE

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 )

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BANK’S ACCEPTANCE

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.

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RELATIONSHIP

At this stage relation of a Buyer & SellerBuyer & Seller comes into operation between the institution & the client.

Since the sale is effected on deferred payment basis, the relation of Debtor Debtor and Creditorand Creditor also emerges between them simultaneously.

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ISSUES IN MURABAHAISSUES IN MURABAHA

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Rollover in MurabahaRollover in Murabaha

Rescheduling is allowed but repricing is not allowed.Rollover is also not allowed.

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Risk Management IN MURABAHA

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Risk Dimensions Credit

Banking Risks

Credit

Credit Liquidity

Prising risk

Market

Foreign Exchange

Solvency

Operational

Islamic Banks also face

-Additional asset risk

-Greater fiduciary risks

-Greater legal risk

Islamic Banks also face

-Additional asset risk

-Greater fiduciary risks

-Greater legal risk

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END OF PRESENTATION

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