Analogy (Qiyas)

Table of contents

Main Reasons of Difference in Islamic And Conventional

MurabahahBackgroundDefinedLegitimacyRules

What makes Murabahah different from Interest Based

Murabahah to Purchase Orderer (MPO)

Bunch of Contract Process flow - customer as Agent Relationships Stages

Product to product MurabahahKey points to check

Meezan Bank Industries/products Customers Murabahah on Phutti (Raw Cotton) Conclusion

Main Reasons Of Differences

Gambling(maisir)

Interest

Uncertainity (gharar ) in contracts

Prohibited (haram) commodities and activities

Murabahah

Background

Trust sale No Financial Intermediaries involvedCustomer purchases directly from supplierOn Cost plus mark-up basisPayments made on a deferred or cash basis Asset already owned by the supplierPurchase price = mark up price that is made known before the transaction.

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DefinitionDerived from word Ribh, which means increaseIt is the mark-up disclosed to the purchaser as per the sellers purchase pricefor a trust-saleOf a certain specified assetExcluding monetary asset such as cash and receivables

Islamic Financial services

Murabahah is adopted as a transaction known as Murabahah to the Purchase Orderer (MPO).Three parties are involved: IFISupplier and Purchase Orderer.

Legitimacy of Murabaha contractThe legality of Murabaha is deduced from the Quran, the Sunnah of the Prophet Muhammad (SAW),the consent of the majority of Muslim jurists and Qiyas(analogy).

The Quran

The Quran generally allows the sales contract. Among others ,the Quran says to the effect that .. And Allah permitted trade and prohibited usury (2:282) The Almighty stated in the Quran: O you who believe! Do not be false to Allah and His Prophet, and do not knowingly be false to the trust that has been reposed in you (8:27).

The SUNNAH The Prophet Muhammad (SAW)was reported to have said:

The best earning is what man earns with his own hands and from a permissible trade (Narrated by Hakim)

Or, the Hadith related by Ibn Hibban and Ibn Majah: Verily, a sale is what takes place when there is mutual agreement.

Muslim Jurists Several of the jurists appealed to ijma as the justifying factor. An interesting twist to the same was claimed by Badr al Din al Ayni, in his commentary on al Hidayah, in which he explained that murabaha is lawful:

.because the item for sale is known, and so is the price. People deal in it without anyones objecting to it. And when people deal in something without objecting to it, that is proof in itself of its validity because the Prophet, upon him be peace, said, What is considered becoming by the Muslims is considered becoming by Allah.

Analogy (Qiyas)Since the prophet Muhammad (SAW)has approved the Tawliyah sale (sale based on cost price), the sale on mark-up will be equally permissible on the basis of analogy on the Tawliyah sale. The determination of cost and making the cost known to the buyer are common in both the Tawliyah and Murabaha sale.

Rules for Murabahah

Rules:Existence of goods

Specification and Identification of goods

Ownership of goods

Possession of goods

Finalization of goods

Risk of goods

What makes Murabahah differ from Interest based finance

Differentiating pointsEscape from interestBy following rules creates clear lineNot a loan on interestCannot be used except where the client require asset(s)Bank must have owned the commodityPossession of bank either physical or constructive

MPO-A Bunch of contract

Master contract

Agency contract

Actual Murabaha contract

Process flow

1). The customer approaches the bank with a request for the purchase of any commodity that can be legally sold on credit

2.The bank appoints the client its agent to purchase the item(s)

3.The bank purchases the commodity through the client as agent.

4.The bank makes payment to the vendor/supplier.

5.The customer takes delivery of the item on behalf of the bank as agent.

6.The customer makes an offer to purchaser and the bank accepts the offer the bank transfer the title over to the customer upon execution of Murabahah.

7.The customer makes payment on a deferred basis without any rollover, discount or rebate.

Nature of relationships

Bank and client : promisor and promisee.Bank and client : principal and agent.Bank and supplier : buyer and seller.Bank and client : seller and buyer.Bank and client : creditor and debtor.

Prerequisites of the various stages of MPO with the client working as agent are discussed Below:

Pre-promise Stage-Facility ApprovalBank and client must be genuine.Murabaha cannot be used for providing liquidity or for cash financing.It is not permissible to transfer a contract that has already been executed between the client and the supplier.The nature of the required commodity should be in the scope of valid Murabaha.The rules of Bai al Sarf, like gold, silver and currencies, are not valid for Murabaha.

Promise Stage-Master Murabaha Facility AgreementLimit of the facilityNature of commodity.Profit margin to be taken by the bank.Schedule of payment.Security to be submitted by the customer.Other terms and conditions will be mutually stipulated.

Purchase Requisition

Requisition to the bank.Contains details of the goods required to be purchased from the bank.If possible the name of the supplier, cost price, and the expected date of delivery.The bank should ensure that the goods are not already owned by the client.Undertaking to the bank that he will buy the goods.The bank may demand a performance bond or guarantee for good performance.

Purchase RequisitionEarnest money(Hamish Jiddiyah).The bank can not recover the conventional cost of funds or liquidated damages in the form of opportunity cost.Advisable - Payment directly to the supplier.Advance payment before delivery Bank may Charge a higher profit margin.

Agency Stage

Can be signed side by side MoU.

Specific agency- non Consistent nature or General- Consistent nature

Purchasing Stage

Cost price is already given.If supplier gives some rebate it should be passed on to the client at the time of execution of Murabahah sale.Prices and amount escalates - the Bank or principal must be informed to be agreed or not.Goods to be purchased are different - Change of commodity can be made with mutual consent.If any delay, the bank may ask the client to refund the cost of goods without any opportunity cost.

Acquisition of Title and Possession of the Asset

The goods must come under the responsibility and risk of the bank.

Sometimes, it happens that the client takes delivery of the goods as agent and uses them in his process of production even before informing the bank and Offer and acceptance

Execution of Murabaha Stage Offer and AcceptanceOffer to purchase the goods Bank will accept the offer and the transaction will be completed.All the terms of the Murabaha transaction, such as contract price (cost plus profit), due date or schedule of payments, etc. must be mentioned in the banks letter of acceptance.Relationship of buyer and seller between the customer and the bank changes into the relationship of debtor and creditor.Having taken delivery of the goods - Customer should confirm that the goods have been examined - in respect of quality and suitability .

Security/Collateral against Murabaha Price

commodity itself .

Other securities may be:Hypothecation charge on assets,A pledge of goods and/or marketable securities,A lien on deposits,A mortgage charge on movable and immovable properties, Bank guarantees,Personal guarantees or any other security mutually agreed between bank and client

Process of Murabahah differs from product toProduct

Application of Murabaha is not simple for all products

Its application differs from products to products like Sugar cane Shares Leather Cotton Gas Petrol

Key points to check

Customer Purchasing CycleInventory holding periodInventory holding methodPayment terms to supplierMode of Payment Storage / warehousing facilityPhysical Inspection Timing of Offer/Acceptance Other industry/goods specific parameters

MEEZAN BANK

Port folio financing on Murabahah 35% to 40% of total financingDo industry based MurabahahMajor Industries covered:

CottonLeatherFoodSugar

Major Customers & Raw material financed:

Ghani glass- Glass ICI- Chemicals Noras- Condensed Sugar Maulvi ghee- Rice, Floor

GINNERS CustomersSuppliers for Meezan bank for raw cottonFarmers (sometimes middle man)

Cotton Industry Of Pakistan How to execute a Marabahah Transaction With An Islamic Bank

Industry Practice

Cotton is produced in bulk

Ultimately turn up in the shape of Cotton Bales. Raw cotton which is unanimously known as Phutti

Order MechanismPayment mechanismDelivery methodsMeasuring UnitsStorage techniquesGinning processBales production

Industrys Need of Financial Assistance

Ginners face shortage of liquidity during their peak season where extensive purchases are done and bulk processing is in process.Financial lines developed with numerous interest-based institutions or local lenders. Islamic financial institutions comprehended their needs and proposed alternate solutions to facilitate the need of purchasing of raw material.

Anomalies in the industry norms

Payment NormMuddaMixing of goodsHeapsImmediate consumptions of goodsShifted in machines-transformed

Solutions offered and Implemented

Payment flaws Rectificationspot rate of the day

Identification of goodsseparated from other goods

Immediate consumption of goodsexecute the transaction before consumption

conclusion

Murabahah fulfills all the conditions necessary for a valid sale.It cannot be used as a mode of financing except where the client needs funds to actually purchase some commodities. The ownership of the subject matter is a extremely essential element of Murabahah, thus financier must own the commodity before he sells it to his client.Industries where raw material is acquired from different sources cannot avail Murabahah unless they are able to identify sources and quantify the goods.