Islamic Microfinance - Islamic Microfinance - MurabahaMurabaha

By: Abdul SamadBy: Abdul Samad

AlHuda Centre of Islamic Banking & AlHuda Centre of Islamic Banking & Economics (CIBE) Economics (CIBE)

Presentation Outline

This module will highlight the following aspects of Murabaha

Step by Step Murabaha Financing Documentation Profit Calculation Issues Conclusion

Murabaha - Definition Murabaha - Definition /Introduction/Introduction

In literary terms Ba’y Murabaha means In literary terms Ba’y Murabaha means “sale on profit”“sale on profit”

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

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

IMFI Murabaha

The product of Murabaha that is being used in Islamic MFI as a mode

of finance is something different from the Murabaha used in normal trade.

This transaction is concluded with a prior promise to buy, submitted by a

person interested in acquiring good/s through the institution.

IMFI Murabaha

It is a contract wherein the institution, upon request by the customer, purchases an 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. 

It is called Murabaha to the purchase order.

It is a bunch of contracts completed in steps and ultimately meets the financial needs of the client.

Scope of Murabaha

As it is a kind of sale, there must be a seller and buyer and something 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 need of the client.

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

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

Step by Step Murabaha Financing

Client and IMFI sign an Agreement to enter into Murabaha (MMFA).

Agreement to Murabaha

IMFI Client

Step by step Murabaha Financing

Client appointed as Agent to purchase goods on IMFI’s behalf. In this case, the concerned branch Manager will explain the appointment of client as an Agent, which will be checked by the Shariah Advisor.

Agency Agreement

IMFI Client

Step by step Murabaha Financing

IMFI gives money to agent/supplier for purchase of goods.

Disbursement to the agent or supplier

Agency

Agreement

Supplier

Agreement to Murabaha

IMFI Client

Step by Step Murabaha Financing

The agent takes possession of goods on IMFI’s behalf.

Transfer of RiskDelivery of goods Vendor

IMFI Agent

Step by Step Murabaha Financing

Client makes an offer to purchase the goods from IMFI through a declaration.

Offer to purchase

IMFI

Client

Step by step Murabaha Financing

IMFI accepts the offer and sale is concluded.

Murabaha Agreement +

Transfer of Title

IMFI Client

Step by step Murabaha Financing

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

Payment of Price IMFI Client

Steps in IMFI’s Murabaha Steps in IMFI’s Murabaha

MOU

Order Form

Agency Agreement

Purchase

Payment of Purchase Price

Possession

Offer and Acceptance (Declaration)

Payment of Murabaha Price

Murabaha Documentations

There are a number of documents involved in a Murabaha financing transaction. The most essential of these documents are:

Master Murabaha Facility Agreement Agency Agreement Order Form Description of assets Declaration Summary Payment Schedule

ISSUES ISSUES RELATED TO RELATED TO MURABAHA MURABAHA

Issues Related To Issues Related To Murabaha Murabaha

IssueIssue Filling/Signing of All Filling/Signing of All

Documents Documents Simultaneously Simultaneously

In certain In certain transactions, the transactions, the bank obtained the bank obtained the complete set of complete set of signed Murabaha signed Murabaha transaction transaction documents from the documents from the customer before customer before actual execution of actual execution of transaction.transaction.

SolutionSolution Shariah Compliance Shariah Compliance officer should physically officer should physically check such irregularity check such irregularity leads to non-compliance leads to non-compliance of the transaction.of the transaction.

EVIDENCE OF PURCHASEEVIDENCE OF PURCHASEIssueIssue In certain transactions In certain transactions

banks do not obtain banks do not obtain sufficient/appropriate sufficient/appropriate evidences of purchase evidences of purchase and delivery of goods.and delivery of goods.

Due to certain reasons Due to certain reasons the bank makes the bank makes purchases in the name of purchases in the name of the customer and the the customer and the invoices and other title invoices and other title documents are in the documents are in the name of the customer.name of the customer.

SolutionSolution The bank should perform The bank should perform some alternative procedures some alternative procedures in order to conform the in order to conform the bonafides of the execution of bonafides of the execution of transaction. e.g. To obtain transaction. e.g. To obtain Gate pass, Weighbridge slips Gate pass, Weighbridge slips Stock record etc.Stock record etc. It is recommended that in It is recommended that in such cases of Murabaha, the such cases of Murabaha, the bank should make payment bank should make payment directly to the suppliers and directly to the suppliers and physical surveys of the goods physical surveys of the goods should be performed on a test should be performed on a test basis. Evidence of receipt of basis. Evidence of receipt of goods should also be obtained.goods should also be obtained.

PHYSICAL VERIFICATION OF PHYSICAL VERIFICATION OF GOODGOOD

ISSUEISSUE

Generally the bank takes the Generally the bank takes the constructive possession, while constructive possession, while the customer actually the customer actually receives the delivery of the receives the delivery of the goods. There is risk that goods. There is risk that Murabaha transaction may be Murabaha transaction may be executed prior to the executed prior to the procurement of goods, which procurement of goods, which will render the Murabaha will render the Murabaha transaction as being mere transaction as being mere financing rather than trading.financing rather than trading.

SolutionSolution1.1. Keeping in view the issue Keeping in view the issue

physical surveys of the physical surveys of the goods should be goods should be performed on a test basis.performed on a test basis.

2.2. As an alternate, evidence As an alternate, evidence of receipt of goods of receipt of goods including third party including third party evidence should be evidence should be ensured.ensured.

DELAYED DECLARATIIONDELAYED DECLARATIION

IssueIssue

In certain transactions In certain transactions banks receive banks receive declaration of the declaration of the purchased goods after purchased goods after significant delay. So significant delay. So there is risk that goods there is risk that goods might already have been might already have been used/sold by the used/sold by the customer.customer.

SolutionSolution

Murabaha transaction Murabaha transaction should be executed as should be executed as soon the goods soon the goods purchased by the purchased by the customer.customer.

ABSENCE OF DATES ON ABSENCE OF DATES ON DECLARATION & INVISESDECLARATION & INVISES

IssueIssue

Absence of date on Absence of date on invoices and declaration invoices and declaration may arise a question may arise a question with regard to the with regard to the permissibility or permissibility or otherwise of the otherwise of the Murabaha sate Murabaha sate transaction.transaction.

SolutionSolution

No invoices with out date No invoices with out date shall be accepted and the shall be accepted and the management should management should remain vigilant to avoid remain vigilant to avoid such weaknesses.such weaknesses.

DIFFRENCE IN DIFFRENCE IN QUANTITIESQUANTITIES

IssueIssueDifference in quantities of Difference in quantities of commodity being purchased commodity being purchased under Murabaha as per under Murabaha as per Declaration and the invoices Declaration and the invoices creates a conflict within creates a conflict within Murabaha documentation.Murabaha documentation.

SolutionSolution1.1. The quantities as per The quantities as per

“Declaration” should be “Declaration” should be similar to that of invoices similar to that of invoices presented unless a presented unless a transaction involves joint transaction involves joint purchases with customer.purchases with customer.

2.2. Where transaction Where transaction involves joint purchases, involves joint purchases, the client must give a the client must give a letter inducting clearly letter inducting clearly the amount purchased for the amount purchased for himself.himself.

3.3. Purchases of shares are a Purchases of shares are a good example of such good example of such case.case.

DISCOUNTS IN DISCOUNTS IN MURABAHAMURABAHA

IssueIssueIt is a general practice, It is a general practice, e.g. in Pharmaceutical e.g. in Pharmaceutical industry that discounts industry that discounts are awarded to the are awarded to the suppliers at the end of suppliers at the end of the year.the year.

The bank generally do The bank generally do not claim any discounts not claim any discounts in this regards at the in this regards at the end of the year.end of the year.

SolutionSolution

The bank should ensure The bank should ensure discounts (if any) discounts (if any) available from supplier available from supplier should be transferred to should be transferred to it.it.

REBATEREBATE

IssueIssue

In certain cases the In certain cases the bank promises to bank promises to gives rebate to the gives rebate to the customer if the customer if the customer settles the customer settles the transaction before transaction before the actual repayment the actual repayment date.date.

SolutionSolution

The bank should not The bank should not agree to give rebate agree to give rebate to the clients in the to the clients in the beginning of beginning of transaction and in transaction and in every case of rebate, every case of rebate, bank should refer to bank should refer to Shariah Advisor.Shariah Advisor.

PRICING IN MURABAHAPRICING IN MURABAHA

IssueIssueIn most of the cases of In most of the cases of import Murabaha, the import Murabaha, the banks do not consider banks do not consider custom duty, LC charges custom duty, LC charges etc in their pricing etc in their pricing mechanism and the mechanism and the customer borne all these customer borne all these charges.charges.

SolutionSolution

These charges related to These charges related to the ownership of the the ownership of the asset and should be asset and should be borne by the bank borne by the bank instead of the customer. instead of the customer. The bank may add these The bank may add these charges in the cost of charges in the cost of Murabaha asset. Murabaha asset.

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