islamic finance murabaha
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MURABAHA
Murabaha is a kind of Sale whereby Cost aswell as the Profit is known to the Buyer andthe Seller.
Payment of Murabaha price may be:
1) At spot In installments
In lump sum after a certain time
Hence, Murabaha does not necessarily imply theconcept of deferred payment.
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PROCESS FLOW OF MURABAHAFINANCING
1. Client and the Bank sign an agreementto enter into Murabaha through a MasterMurabaha Financing Agreement (MMFA).
Agreement toMurabaha
Bank Client
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PROCESS FLOW OF MURABAHAFINANCING
2. Client appointed as an agent to purchasegoods on the Banks behalf.
Agreement to
Murabaha
Bank Client
Agency
Agreement
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PROCESS FLOW OF MURABAHAFINANCING
3. Bank gives money to an agent/supplierfor purchase of goods.
Disbursement to the agent or supplier
Agency
Agreement
Supplier
Agreement toMurabaha
Bank Client
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PROCESS FLOW OF MURABAHAFINANCING
4. The agent takes possession of goods onthe Banks behalf.
Transfer of RiskDeliveryof goods
Vendor
Bank Agent
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PROCESS FLOW OF MURABAHAFINANCING
5(a). Client makes an offer to purchase thegoods from the Bank through adeclaration.
Offer topurchase
Bank Client
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PROCESS FLOW OF MURABAHAFINANCING
5(b). Bank accepts the offer and sale isconcluded / culminated
Murabaha Agreement+
Transfer of Title
Bank Client
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PROCESS FLOW OF MURABAHAFINANCING
6. Client pays agreed price to the Bankaccording to an agreed schedule. Usuallyon a deferred payment basis (Bai Muajjal)
Payment of Price
Bank Client
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STAGES IN MURABAHA FINANCING
There are two stages in Murabaha transaction:
Investment Stage (Agency to Purchase)
Financing Stage (Declaration to payment)
Profit Recognition in Murabaha
The profit for the Murabaha transaction shall berecognized after the goods are sold by the bank to thecustomer.
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MURABAHA DOCUMENTATION
There are a number of documents involved in aMurabaha financing transaction. The mostessential of these documents are:
Master Murabaha Financing Agreement(MMFA)
Agency Agreement Draw Down Notice Summary Payment Schedule Declaration Details of Assets
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1) Master Murabaha Agreement
Its an agreement between the client and the
Bank whereby the client agrees to purchasegoods from the Bank from time to time as perthe terms and conditions of this Agreement.
This is an over all facility agreement underwhich various Sub-Murabahas may beexecuted from time to time.
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2) Agency Agreement
The client is appointed by the Bank as its agent to purchase goods. Thisagreement needs to be signed once between the client and the bank.
The disbursement of funds is done under this Agreement.
List of assets form part of the main Agency Agreement which defines the assetsthat the client is authorised to by on behalf of the bank acting as an agent.
3) Draw Down Notice
These documents are required for each disbursement/Murabaha tranche.
Draw down notice must mention the amount.
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4) Summary Payment Schedule
Summary of Payment schedule should be finalized prior to signing of declarationof Murabaha agreement.
5) Declaration (Offer & Acceptance document)
Declaration is to be signed by the customer immediately after the purchase ofthe goods by the customer.
This document establishes the actual sale transaction, i.e. transfer of ownershipof goods from the Bank to the customer.
At this stage the specific details of the assets must be known i.e. quantity,quality, price etc.
Proper timing of declaration is extremely important.
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6) List of Assets
This forms part of the declaration whereby details of the goodspurchased are disclosed.
Purchase evidences to be attached with the details of assets asa proof of purchased by the client as an agent of the Bank.
The purchase evidences may includes the invoices, good
receiving notes, good delivery challans or any other suitableevidence, preferably in the name of the Bank or in the name ofthe client as an agent of the Bank.