lecture no.07 permissible financing methods

7/27/2019 Lecture No.07 Permissible Financing Methods

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MURABAHAFINANCE

Abdur Rashid M irza University of LahoreSchool of Accountancy and Finance

Lecture no.07

Financial Engineering


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DEFINATION OF MURABAHA

The word Murabaha has beenderived from the Arabic word

Ribah , which has literary meaningof profit.

The Murabaha can be denoted as SaleWith Profit .


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DEFINITION OF MURABAHA

Murabaha is a particular kind of sale where Seller expressly mentions thecost it has incurred on purchase of the

Asset(s) to be sold and sells it toanother person by adding some profit,

which is known to Buyer.


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WHAT IS SALE?

Sale is defined in the Islamic Fiqh asfollows:

Exchange of a thing (subjectmatter) of value with another thing

of value, with mutual consent .


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FEATURES OF MURABAHA

Murabaha finance is not a loan givenon interest, it is a sale of Asset(s) forcash/deferred price.

It is the obligation of the Seller todisclose the Cost and Profit to theBuyer.


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Murabaha Transaction can either be acash sale (Spot Payment Murabaha) or a credit sale (Deferred Payment

Murabaha) or a combination of both.

Payment of Murabaha Price can bemade in lump sum or ininstallments or combination of both.


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

The Murabaha Finance can be usedto meet the working capital

requirements . However, it cannot beused to meet the liquidity requirements.


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Credit Sales (Bai-Bithman Ajil)

This concept refers to the sale of goods on adeferred payment basis at a price, whichincludes a profit margin agreed to by bothparties. This is similar to Murabahah, exceptthat the debtor makes only a singleinstallment on the maturity date of the loan.By the application of a discount rate, anIslamic bank can collect the market rate of interest.

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In Murabahah, both parties to the transaction mustknow the cost and also the profit. This is a trust-salewhere the buyer trusts that the seller has made a truthfuldisclosure about the cost and Profit.

Payment of the price may be spot or deferred dependingon the agreement.

A Bai Bithaman Ajil (BBA) refers to the deferred modeof payment in a sale. It is also known as Bai Muajjal .

In BBA- the deferred payment has been made andagreed at the beginning of the contract .

Murabahah and Al BaiBhitaman Ajil (BBA)


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IJARAH

Abdur Rashid M irza

University of LahoreSchool of Accountancy and Finance

Lecture no.07


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Concept of IjarahIjarah is a term of Islamic fiqh . It means to givesomething on rent .Ijarah related to the usufructs (the right to enjoybenefits or profits from something, as realproperty, while not being the owner of it.) of assetsand properties, and not the services of humanbeings. Ijarah in this sense means to transfer theusufruct of a particular property to another personin exchange for a rent claimed from him. In thiscase, the term Ijarah is similar to the Englishterm leasing . Here the lessor is called Mujir , thelessee is called mustajir and the rent payable tothe lesser is called ujrah .

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Leased property remains in the ownership of the seller.

M ust be determined in clear terms at the time of contract I f no specific purpose is identif ied in the agreement,then i t can be used for any purpose for which i t is

used in normal course.

BASIC RULES OF IJARA


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Lessee as Ameen The lessee is l iable to compensate the lessor for every har m to the leased asset caused by any mi suse or negl igence . The leased asset shal l r emain in the r isk of the lessor throughout the lease period.

Lease of jointly owned property

I s permi tted and r entals shal l be distr ibuted between all the joint owners according to the propor tion of their respective shares in the proper ty.


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Determination of Rental

The rental must be determined at the time of contract

for the whole per iod of lease.I t i s permissible that different amounts of r ent are f ixed for dif ferent phases dur ing the lease per iod, provided that the amount of rent for each phase is specifically agreed upon at the time of effecting a lease.The determination of rental on the basis of the aggregate cost i ncur red in the pur chase of the asset by the lessor, as normally done in f inancial leases, is not against the rul es of Shar iah.



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Determination of Rental

The lessor cannot increase the rent i ndividuall y, and any agreement to th is ef fect is void.

The lease period shall commence from the date on which the leased asset has been delivered to the lessee.

Rental wil l be charged when the L eased asset i s handed over to the lessee.



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IJARA AS A MODE OFFINANCING

4 . L essee as Ameen The lessee is responsible for any loss caused to the asset by hi s misuse or negligence. H e can also be made l iable to any normally occurr ing wear and tear.

5. Variable Rentals in L ong Term L eases I n this case the lessor has two options: A lease contract can have a condition that the rent shal l be increased according to a specif ied propor tion (e.g.5%) af ter a specif ied per iod (like one year).H e can contract lease for a shor ter per iod af ter which the parti es can r enew the lease at new terms and by

mutual consent


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IJARA AS A MODE OFFINANCING

6. Penalty for late payment of Rent The lessor cannot charge an additional amount in case the lessee delays payment of the rent. Penalty of late payment i s given to chari ty by l essee

7. Termination of L ease I f the lessee breaks any term of the agreement, the lessor has a right to terminate the lease contr act individually. I f not then i t can be terminated through

mutual consent only. H owever , in such a case he cannot charge rentals of r emaining per iod. Fur ther more, the destruction of the asset al so terminates the lease. In the event of lessees death the lease will also beterminated


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IJARA AS A MODE OF

FINANCING08. I nsurance of the assets

I f the leased proper ty is insured under the

I slamic mode of Takaful , i t should be at the expense of the lessor and not at the expense of the lessee

09. The residual value of the leased asset The lessor may enter into a independent under taking to sel l the leased asset to the lessee at the end of the lease per iod. This under taking wil l be binding on the lessor only.


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Abdur Rasid Mirza , Economic and FinancialAnalystAssociated Consulting Engineers ACE (Pvt.)Ltd.Faculty Member of University of Lahore, Schoolof Lahore, School of Accountancy and FinanceResearch Scholar (Islamic Banking and Finance)

Mobile no. 0300-4210261Email Address: [email protected] Email address: [email protected]

Author Introduction

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mailto:[email protected]:[email protected]:[email protected]:[email protected]


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JAZAKUM UALLAH

lecture no.07 permissible financing methods

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