Islamic Microfinance - Murabaha
Post on 15-Jan-2016
DESCRIPTIONIslamic Microfinance - Murabaha. By: Abdul Samad AlHuda Centre of Islamic Banking & Economics (CIBE). Presentation Outline. This module will highlight the following aspects of Murabaha Step by Step Murabaha Financing Documentation Profit Calculation Issues Conclusion. - PowerPoint PPT Presentation
Islamic Microfinance - MurabahaBy: Abdul SamadAlHuda Centre of Islamic Banking & Economics (CIBE)
Presentation OutlineThis module will highlight the following aspects of MurabahaStep by Step Murabaha Financing DocumentationProfit CalculationIssuesConclusion
Murabaha - Definition /IntroductionIn literary terms Bay Murabaha means sale on profit
Murabaha is a particular kind of sale where the seller discloses the cost and profit charged thereon.
The price in this sale can be both on spot and deferred
IMFI MurabahaThe 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 MurabahaIt 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 MurabahaAs 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).
Step by step Murabaha Financing Client appointed as Agent to purchase goods on IMFIs 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.
Step by step Murabaha Financing IMFI gives money to agent/supplier for purchase of goods.
Step by Step Murabaha Financing The agent takes possession of goods on IMFIs behalf.
Step by Step Murabaha Financing Client makes an offer to purchase the goods from IMFI through a declaration.
Step by step Murabaha Financing
IMFI accepts the offer and sale is concluded.
Step by step Murabaha Financing Client pays agreed price to IMFI according to an agreed schedule. Usually on a deferred payment basis (Bai Muajjal)
Steps in IMFIs Murabaha MOU Order FormAgency AgreementPurchase Payment of Purchase PricePossessionOffer and Acceptance (Declaration)Payment of Murabaha Price
Murabaha DocumentationsThere 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 RELATED TO MURABAHA
Issues Related To Murabaha
IssueFilling/Signing of All Documents Simultaneously In certain transactions, the bank obtained the complete set of signed Murabaha transaction documents from the customer before actual execution of transaction.Solution Shariah Compliance officer should physically check such irregularity leads to non-compliance of the transaction.
EVIDENCE OF PURCHASE
IssueIn certain transactions banks do not obtain sufficient/appropriate evidences of purchase and delivery of goods.Due to certain reasons the bank makes purchases in the name of the customer and the invoices and other title documents are in the name of the customer.
Solution The bank should perform some alternative procedures in order to conform the bonafides of the execution of transaction. e.g. To obtain Gate pass, Weighbridge slips Stock record etc. It is recommended that in such cases of Murabaha, the bank should make payment directly to the suppliers and physical surveys of the goods should be performed on a test basis. Evidence of receipt of goods should also be obtained.
PHYSICAL VERIFICATION OF GOOD
ISSUEGenerally the bank takes the constructive possession, while the customer actually receives the delivery of the goods. There is risk that Murabaha transaction may be executed prior to the procurement of goods, which will render the Murabaha transaction as being mere financing rather than trading.SolutionKeeping in view the issue physical surveys of the goods should be performed on a test basis.As an alternate, evidence of receipt of goods including third party evidence should be ensured.
In certain transactions banks receive declaration of the purchased goods after significant delay. So there is risk that goods might already have been used/sold by the customer.Solution
Murabaha transaction should be executed as soon the goods purchased by the customer.
ABSENCE OF DATES ON DECLARATION & INVISES
Absence of date on invoices and declaration may arise a question with regard to the permissibility or otherwise of the Murabaha sate transaction.Solution
No invoices with out date shall be accepted and the management should remain vigilant to avoid such weaknesses.
DIFFRENCE IN QUANTITIES
IssueDifference in quantities of commodity being purchased under Murabaha as per Declaration and the invoices creates a conflict within Murabaha documentation.SolutionThe quantities as per Declaration should be similar to that of invoices presented unless a transaction involves joint purchases with customer.Where transaction involves joint purchases, the client must give a letter inducting clearly the amount purchased for himself.Purchases of shares are a good example of such case.
DISCOUNTS IN MURABAHA
IssueIt is a general practice, e.g. in Pharmaceutical industry that discounts are awarded to the suppliers at the end of the year.The bank generally do not claim any discounts in this regards at the end of the year.SolutionThe bank should ensure discounts (if any) available from supplier should be transferred to it.
IssueIn certain cases the bank promises to gives rebate to the customer if the customer settles the transaction before the actual repayment date.SolutionThe bank should not agree to give rebate to the clients in the beginning of transaction and in every case of rebate, bank should refer to Shariah Advisor.
PRICING IN MURABAHA
IssueIn most of the cases of import Murabaha, the banks do not consider custom duty, LC charges etc in their pricing mechanism and the customer borne all these charges.SolutionThese charges related to the ownership of the asset and should be borne by the bank instead of the customer. The bank may add these charges in the cost of Murabaha asset.
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