murabaha documentation & practical issues.pdf

8/14/2019 Murabaha Documentation & Practical Issues.pdf

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Murabaha Documentation

&

Practical Issues

1

Part II


& Practical Issues

2


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There are a number of documents involved in a Murabaha

financing transaction. The most essential of these documentsare:


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


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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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-


. .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


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


, ,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 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


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


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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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.

murabaha documentation & practical issues.pdf

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