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Murabaha Documentation
&
Practical Issues
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Part II
Murabaha Documentation
& Practical Issues
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There are a number of documents involved in a Murabaha
financing transaction. The most essential of these documentsare:
Murabaha Documentation
Master Murabaha Financing Agreement
Agency Agreement
Order Form / Draw Down Notice
Declaration
Schedule of Assets
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Murabaha Contract
Purchase Evidences Payment Schedule
Master Murabaha Financing Agreement (MMFA)
Its an agreement between the client and the Bank whereby
Murabaha Documentation
e c en agrees o purc ase goo s rom e an rom meto time as per the terms and conditions of this agreement.
This is an over all facility agreement under which variousSub-Murabahas may be executed from time to time.
Hence it needs to be signed once at the time the facility issanctioned.
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The list of Assets the customer will purchase from time totime from bank will be mentioned in this agreement.
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Murabaha Documentation
gency greemen
Through this agreement, the Bank appoints customer its agentto select and procure specified goods for the Bank.
This agreement needs to be signed once between the clientand the bank to cover the specified agency period.Thedisbursement of funds is done under this agreement.
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Order Form
This document is executed at the time of each sub-
Murabaha Documentation
. .requires Murabaha for purchase of assets.
Through this document customer requests the bank topurchase the assets from the supplier and undertakes that it
will purchase the assets from the bank on spot paymentbasis unless otherwise mutually agreed, once the bankacquires them from the market
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The customer also undertakes to compensate for the actualloss the bank may suffer in case that he fails to purchasethe assets from the bank.
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Declaration
Murabaha Documentation
process. Declaration is to be signed by the customer immediately
after the purchase of goods as Banks agent but before theactual consumption.
Through this document customer declares that he haspurchased and received the goods as banks agent.
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i.e. quantity, quality, cost etc. and the ownership of MBL inthe assets through schedule of assets.
Declaration
Murabaha Documentation
, ,invoice must be furnished along with the Declarationspecifying the full details of the goods purchased.
The cost of goods must be inclusive of all cost including salestax, transportation and handling etc.
Proper timing of declaration is extremely important especiallyin cases of perishable or immediately consumable
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.
Cost of goods (including all costs) should be determined atthis stage and stated clearly in the Declaration.
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Murabaha Contract
Murabaha Documentation
Murabaha Contract is the most important part of theMurabaha process.
This document establishes the actual sale transaction, i.e.transfer of ownership of goods from the Bank to the customer
Murabaha Contract price should be clearly determined
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roug s ocumen .
Payment Schedule
Murabaha Documentation
will make from time to time or at once towards the payment of
Murabaha price.
This shall be executed at the time of execution of Murabaha
Contract. The dates mentioned in the schedule corresponds to the day
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.
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Practical Issues
in Murabaha
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1. Subject Matter2. Timing of Order Form
Issues in Murabaha
3. Mode of Payment to Supplier: Direct or Indirect4. Timing of Offer & Acceptance5. Credit Payment to suppliers6. Purchase Evidence7. Self-made Purchase Evidence8. Rollover in Murabaha9. Rebate on Early payment
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.11. Profit recognition12. Training of Customer & Bank staff13. Process of Murabaha differ from product to products.
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Subject matter of Murabaha
Issues in Murabaha
.
Murabaha cannot be done in all commodities, e.g. such ascurrencies, gold, silver.
Murabaha cannot be used for paying utility bills, wages,overhead expenses, etc.
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General rules of sale related to subject matter must befollowed
Timing of Order Form
Issues in Murabaha
Disbursement advise.
Through Order Form customer asks MBL to purchase goods for
customer. Subsequently MBL asks customer to procure
goods as Agent of MBL
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Murabaha transactions
Order form must be placed ideally before / along with
finalization of order with supplier and well before
dispatch of goods from suppliers premises
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Issues in Murabaha
Mode of Payment (Direct or Indirect)
DIRECT PAYMENT
1. MBL Cross Cheque (in favor of supplier)
2. MBL Pay Order (in favor of supplier)
3. MBL Demand Draft (in favor of supplier)
INDIRECT PAYMENT
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Any Other Payment mode, except the cases mentioned above, is
deemed to be INDIRECT Payment, unless otherwise classifiedby Shariah Advisor.a
Issues in Murabaha
Mode of Payment (Direct or Indirect)
With reference to SBP (IBD) Circular # 2 of 2008 and IBD
Circular No. 04 (dated November 15, 2008) Quote:
IfIf DirectDirect PaymentPayment toto thethe suppliersupplier byby thethe IBIIBI isis notnot feasiblefeasible
forfor validvalid reasons,reasons, suchsuch reasonsreasons shallshall bebe recordedrecorded byby thethe IBIIBIforfor makingmaking paymentpayment toto thethe suppliersupplier throughthrough thethe agentagent forfor
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.. ,,
ofof fundsfunds shallshall bebe ensuredensured byby thethe IBIIBI..
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Timing of Offer & Acceptance
A Murabaha financin arran ement consists of a series of
Issues in Murabaha
documents to be executed at various stages, the sequenceand timing of which is extremely important.
Through this, client and the bank execute an important stepof a valid Murabaha sale i.e. Offer & Acceptance.
This is to be signed by the customer when it has purchased
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an a en possess on o e goo s as e an s agen .
Offer & Acceptance must be signed while the goods are stillin existence and have not been used in the productionprocess or sold to some other entity.
Issues in Murabaha
Credit Payment to suppliers
Customer makes a ment to su liers AFTER certain da s of
receipt of goods
Example:
*Issuance of Post-dated cheque against dispatch of goods OR
* Payment through Pay Order / DD / Cheque after lapse of fewdays after receipt of goods
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Normally in trade business Cash/Spot means Payment after 7
to 15 days of confirmation of Order. This will be treated as
Credit Payment
In these case Order Form should be placed before purchase of
Goods from the supplier
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Purchase Evidence
Issues in Murabaha
the assets as claimed, the customer is required to submitasset purchase evidence along with Declaration.
The purchase evidence must confirm that the assetpurchase took place after the agency agreement.
Asset purchase may be in the form of Invoices, delivery
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or ers, ruc rece p s e c.
Issues in Murabaha
Self-made Invoices
In case Invoices are not received from the su lierat the time
of receipt of goods, customer should not provide SELF-MADE
Invoicesagainst the purchases made.
Instead Murabaha Contract should be signed by providing
following documents as proof of fresh purchase
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Challan/Inventory Report
along with customer confirmation regarding purchase price
(carrying sign & stamp of the customer).
In these cases customer should submit the Invoices to MBL upon
receipt from the supplier for100% of the disbursedamount
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Rollover in Murabaha
Issues in Murabaha
Rollover in Murabaha is not allowed since each Murabahatransaction is for the purchase of a particular asset. A newMurabaha can only be executed for the purchase of newassets.
It is advisable that whenever practicable there must be a gapof 1-2 days between maturity of the previous Murabaha and
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s ursemen o e new one.
Rebate on early payments
Issues in Murabaha
If the customer makes early payment and there is nocommitment from the institution in respect of any discount inthe price of Murabaha, than the institution has the solediscretion in allowing them the rebate.
It is not recommended to make it a practice and must beavoided in normal course of business. Such issue, if arises,
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should be brought in the knowledge of Shariah advisor
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Penalty on late payments
Issues in Murabaha
As soon as the Murabaha is executed, the Murabaha pricebecomes a receivable (Dayn) for the Bank. Hence, anyamount charged over and above the dayn amount will beRiba.
However, it is permissible to have an undertaking from the
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debt to be donated to charitable causes in the event of delayin payment/installments.
Profit Recognition in Murabaha
Issues in Murabaha
Investment Stage (Agency to Declaration) Financing Stage (Murabaha Contract to payment)
The profit for the Murabaha transaction can be recognizedafter the goods are sold by the bank to the customer.
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Training of Customers & Bank staff
Issues in Murabaha
Proper training & understanding of is very important for
Bank staff dealing with the Murabaha Customers purchase officers & accounts staff.
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Issues in Murabaha
Process of Murabaha differ from product to product
A lication of Murabaha is not sim le for all roducts
Its application differs from products to products like Sugar cane Shares
Leather Cotton Gas
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Therefore the RM/RO dealing with the customer needs tounderstand and define step wise process flow along with thecredit approval for each new customer/industry
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Customers Responsibility
Customers Responsibility
Ensure that goods are purchased after the execution ofAgency agreement as banks agent & Order form.
Proper Fund utilization under agency as client is actingas a trustee/ameen on banks behalf. However, it is morepreferable that direct payment is made to the supplier.
Actual purchase of goods and its timely intimation to thebank.
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.moment the bank may conduct a physical inspection of thegoods.
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Customers Responsibility
Purchase of goods from the bank with a help of valid offerand acce tance via Murabaha Contract before theirconsumption.
Timely payment of the agreed Murabaha price.
A request for disbursement of new Murabaha for paymentof old debt is not allowed and should be strongly avoided.
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, ,overhead expenses, etc.
Bank / RelationshipManagers (RM)
Responsibility
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RMs Responsibility
Ensure that Customers need & purchase process cycle is fully
understood and conforms to the approved Murabahaprocesses.
Define a step wise process for Murabaha for each customer inview of the specific industry requirement, product natureinvolved, supplier payment terms (credit or cash etc).
Ensure that the Credit proposal must define the process flowclearly and have Shariah Advisors approval.
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Ensure that customer is properly briefed about the requirementof Murabaha
Ensure that MMFA & Agency agreement are executed beforeany disbursement to the client.
RMs Responsibility
Ensure that payment is made directly to the supplier ofgoods. In cases where funds are disbursed to the clientunder Agency, it must be ensured that they are properlyutilized for the actual purchase of the required goods.
Once the goods have been purchased by the Client anddeclaration and Murabaha Contract is forwarded to the bank,the RM must ensure the presence of goods at client end. (atleast via telephonic verification at the factory,warehouse etc)
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to verify the same. ( at least in 10%-15% cases).
The relevant purchase invoices must be collected as soon asthe client makes purchases of the goods.
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RMs Responsibility
The Murabaha Contract must be executed immediately,before consumption of goods, to transfer the ownership tothe client. The timeline given for Murabaha Contract shouldbe taken as maximum time allowed for Murabaha Contractreceipt.
Murabaha should not be used for paying utility bills, wages,overhead expenses, etc.
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old debt is not allowed and to be strongly avoided.
Credit Admin Officer (CAD)
Responsibility
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CAD Responsibility
Ensure that the Credit proposal have Shariah Advisors
approval before disbursement.
Ensure that MMFA & Agency agreement are executed beforeany disbursement to the client and are properly filled andwitnessed
Description of assets in the Agency Agreement is complete
Filled Order form from the customer must be available before
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The goods described in the Order form confirms to theAgency agreement.
CAD Responsibility
Ensure that goods are purchased after the execution ofAgency agreement as banks agent and Order Form.
The declaration for Murabaha is available as per the policyguidelines provided.
The goods described in the declaration form confirms to the
Agency agreement.
The declaration must be properly filled, signed and witness.
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,
No Murabaha is disbursed just to settle old Murabaha debt(see Rollover in Murabaha section)
Check invoice and Purchase evidence thoroughly.
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Murabaha Monitoring Sheet:
As per the guidelines of Shariah Advisor, Murabaha MonitoringMechanism MMM has been im lemented at MBL via PDSC
Murabaha Checking & Monitoring
Policy # 24 dated November 8, 2005 to ensure timely receipt of
Declarations & Purchase Evidences.
Monthly Murabaha Status Sheet
For the Month: March, 2005.
Branch : PNSC (Corporate)
Report Date
CBD NO.
Sub-
Decaration
DateCustomer
Name
Subject
Matter
Date of
Disbursem
ent
Invoice
DatePayment
Mode (Direct /
Declaration
Gap
Difference b/w
Declaration &
Invoice Dates
Maturity
DateTenor / No
of Days
Purchase
Gap
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Declaration OutstandingCBD-650/05 A Auto Spare pa D 7-Feb-05 8-Feb-05 20-Feb-05 5-Sep-05 210 1 13 12
CBD-650/05 B Sugar cane D 8-Feb-05 9-Feb-05 10-Feb-05 7-Aug-05 180 1 2 1
CBD-650/05 C Cotton D 9-Feb-05 10-Feb-05 11-Feb-05 9-Jun-05 120 1 2 1
CBD-650/05 D Rice D 10-Feb-05 11-Feb-05 12-Feb-05 9-Aug-05 180 1 2 1
(S)(D) (I)
Indirect)(S-D)
(S-I)(M) (M-D) (I -D )
Purpose:
The ur ose of im lementin Murabaha-Monitorin Mechanism
Murabaha Checking & Monitoring
(MMM) is:
To improve the quality of Murabaha transactions,
To reduce the gap between disbursement and purchase
evidence,
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transactions in Commercial Banking, Corporate and at all
branch level.