murabaha to purchase order by muhammad mohsin ahmed

8/11/2019 Murabaha to Purchase Order by Muhammad Mohsin Ahmed

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MURABAHA

Murabaha is a particular

kind of sale where the seller

discloses its cost and profitcharged thereon.

The price in this sale can beboth on spot and deferred.


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BANKING MURABAHA

The product of Murabaha that is being

used in Islamic banking as a mode of

finance is something different from theMurabaha used in normal trade .

This transaction is concluded with a

prior promise to buy, submitted by a

person interested in acquiring goods

through the institution.


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BANKING MURABAHA

It is called Murabaha to the purchase orderer .

It is a bunch of contracts completed in steps

and ultimately suffices the financial needs ofthe client.

The sequence of their execution is extremely

important to make the transaction Shariahcompliant.


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BANKING MURABAHA

It is a contract wherein the institution,

upon request by the customer, purchases

a 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.


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SCOPE OF MURABAHA

As it is a kind of sale, there mustbe a seller and buyer and some thingthat is bought and sold . The

institution is the seller and the clientis buyer.

It cannot be used as a substitute for

running finance facility , whichprovides cash for fulfilling variousneeds of the client.


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SCOPE OF MURABAHA

It is a fixed price sale and normally

is done for short term.

The transaction can be used in order

to meet the working capital

requirements however it cannot be

used to meet liquidity requirements.


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STAGES OF MURABAHA

1. Promise Stage

2.Agency Stage

3. Acquiring Possession

4. Execution of Murabaha

5. After Execution of Murabaha


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STAGES OF MURABAHA

PRIOMISE STAGE


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CREDIT APPROVAL (under

Shariah perspective)

Points to Be Cons idered Whi leApp rov ing Credi t

It is essential that the transaction betweentwo parties must be genuine , not fictitious

and should exclude any prior contractualrelationship between the customer andoriginal supplier .

It is not permissible to transfer a contract

that has been executed before between clientand supplier. However revocation of priorcontract between the supplier and the clientcan allow the institution to enter in Murabaha


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Points to Be ConsideredWhile Approving Credit

The Institution must insure thatthe party from whom the item isbought is a third party and not thecustomer or his agent . In this

manner the transaction can besaved from Bai Inah (Buy Back)which is not allowed in sharia.


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Nature of the Business to be in scope of the

Murabaha . Nature of business should be

Halal in order to finance it through

Murabaha.Differed payment not permissible in case of

Gold, Silver and Currencies.

Cyclical nature of the business


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SPECIFIED Commodities study in

respect of

Uniqueness

Pricing

Active Market

Risk Profile

Cash Flow Analysis

Commitment Fee not permissible.

After these consideration limit may

be approved


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CONTINUED

The Client orders the institution tobuy certain goods for him and sellhim the same after acquiring. The

prerequisite is that the goods are not

already owned by the client.At this stage the customer promisesthe institution to buy the goods

which were acquired by the institute

on his request.


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CONTINUED If the supplier is nominated by the

client himself, guarantee for goodperformance can be demanded.

An advance payment (calledHamish jiddiyyah) may be receivedfrom the customer as a form ofsecurity deposit.

In case of breach of promiseHamish Jiddiyyah can be used torecover actual damage however it

cannot be used for covering theCost of Funds / Opportunity Cost.


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STAGES OF MURABAHA

AGENCY STAGE


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AGENCY STAGE

Agency Agreement is not thecondition of the Murabaha if theinstitution can make direct

purchases from the supplier.

The financial institution, does not

have the expertise to identify thegoods and negotiate an efficient

price.

The customer, however, being in

the industry, can do this. The institution therefore appointshim as its Agent (which is also

permissible), in the first step of thetransaction, to identify and procure

the goods on institution behalf.


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AGENCY STAGE

This is done by execution of AgencyAgreement between the institution andthe customer.

However according to ShariaPerspective it is preferable to appointthe Agent other then customer.

If goods are acquired from third partythe execution of agency agreement will

be between the institution & the thirdparty.


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AGENCY STAGE

TYPES OF AGENCY AGREEMENT

1. GLOBAL AGENCY AGREEMENT

When the purchase of commodity is

not of consistent nature.

2. SPECIFIC AGENCY AGREEMENTWhen the purchase of commodity is of

consistent nature.


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STAGES OF MURABAHA

ACQUIRING POSSESION


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ACQUIRING POSSESION

Advance payment can be made to the

supplier.

Discoun t On Acquis i t ion Of Assets

Discounts from supplier (If any)would be passed on to the customer

at the time of Murabaha Sale by

reducing the cost of sales.


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ACQUIRING POSSESION

If there is a rise in prices and the

amount escalates for which financing

is availed than the transaction canonly be executed if the bank has been

informed and the bank subsequently

accepts the same.

The institution reserves the right to

reject the purchases if made other

then agreed price.


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ACQUIRING POSSESION

Change of commodity in the agencyagreement can be done with mutual

consent.

Delay in Supply from the Supplier.

Delay in Supply from the supplier in case

where specific time was allowed leads to

the revocation of agency agreement. In

such cases the customer will refund thecost of goods.


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ACQUIRING POSSESION

Rejection On Ground Of Quality

If the customer rejects the goods on ground of

inferior quality before the execution of

Murabaha, new quality can be acquired throughnew Murabaha.

After execution of Murabaha the bank will not

be liable for any discrepancies.


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ACQUIRING POSSESION

Acquisition Of Title & PossessionOf The Asset

1. Institution must take actual or constructivepossession of the item .

The forms of taking delivery or possession of itemsdiffer according to their nature and customs.

The item must move from the responsibility of thesupplier to the responsibility of the institution .

It is obligatory that the point when the risk of theitem is passed on by the institution to thecustomer, be clearly identified.


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ACQUIRING POSSESION

2.Goods must exists at the time of execution ofMurabaha.

If the above two are not fulfilled than theinstitution cannot execute Murabaha.

Documentary evidence required at the timeof possession before execution of Murabahai.e delivery challan, gate passes and sales taxinvoices.

Murabaha payment to be made directly to thesupplier by the bank.


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ACQUIRING POSSESION

Importance of Physical Inspection

Registration is in the name ofinstitution for those items where

registration is required.


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STAGES OF MURABAHA

EXECUTION OF

MURABAHA


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EXECUTION OF MURABAHA Customer, as an Agent, confirms that goods have

been purchased & same are in his possession and that

payment has been made to the supplier.

Customer makes an offer to purchase the goods from the

institution.

Institution accepts the offer by stating the Cost price plus

amount of Profit and the due date for Payment by which

sale is concluded.

At this stage relation of a buyer & seller comes intooperation between the institution & the client, & sincethe sale is effected on deferred payment basis, the relationof debtor and creditor also emerges between themsimultaneously.

C O O A A A


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EXECUTION OF MURABAHA

Customer having received delivery of Goodsas per Purchase Requisition confirms thatgoods have been examined and are

satisfactory in respect of quality andsuitability for his use.

The customer also releases the institutionfrom any liability in respect of the goods in

any manner

AFTER EXECUTION OF


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AFTER EXECUTION OF

MURABAHA

Securities Against Murabaha PriceThe institution may ask the customer to

furnish a security to its satisfaction for promptpayment of the deferred price.

However, it is also permissible that thecustomer furnishes a security at earlier stagesbut after the Murabaha price is determined.

It is also permissible that the sole commodity

itself is given to the seller as a security. It is preferable not to take Interest bearing

instruments as securities.


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AFTER EXECUTION OF

MURABAHA

CASE OF DEFAULT

In the case of default by the buyer in the payment ofprice at the due date, the price cannot be increased.

However if he has undertaken, in the agreement topay certain amount for a charitable purpose, he shallbe liable to pay the amount undertaken by him.

But this recovered amount from the buyer will not beconsidered penalty nor compensation, therefore it willnot account to institutions income.

Institution is bound to spend it for a charitablepurpose on behalf of the buyer.


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ISSUES IN MURABAHA

Rebate in Early PaymentIf the customer makes early payment and

there is no commitment from the institution inrespect of any discount in the price of

Murabaha, than the institution has the sole

discretion in allowing them the rebate.

Rollover in Murabaha

Rescheduling is allowed but repricing is not

allowed.

Rollover is also not allowed.


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ISSUES IN MURABAHA

Buy Back

Under Murabaha Financing once the goods

purchased by the client from the Bank the same

goods cannot be Pledged/ Hypothecated for raising

finance facility from the Islamic Bank.

Rebate on Early Payments

It is prohibited by Shariah Standards to give Rebate

to the client on early payment as under Murabaha the

price is fixed.


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Step by step Murabahafinancing1. Client and bank sign an

agreement to enter into Murabaha.

Murabaha

Agreement toMurabaha

Islamic

ank

Client


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2. Client appointed as agent to

purchase goods on banksbehalf

MurabahaStep by step Murabaha

financing

Agency

Agreement

ank Client

Agreement toMurabaha


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3. Bank gives money to client for purchase of goods.

Murabaha

Step by step Murabaha financing

Agreement to

Murabaha

AgencyAgreement

Disbursement to the client

Islamic ank

ank Client


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MurabahaGENERAL MECHANICS

CUSTOMERISLAMIC BANK AgreementVENDOR

The customer approaches the Bank with therequest for financing

The Bank purchases and receives title of ownershipfrom the vendor

The Bank makes payment to the vendor

The Bank transfers the title over to the customer uponpayment

The customer makes payment up-front or on a

deferred basis


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Risk ManagementIN

MURABAHA


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Risk

DimensionsCredit

Banking

Risks

Credit

CreditLiquidity

Interest Rate

Market

Foreign Exchange

Solvency

Operational

Islamic Banks also face

-Additional asset risk

-Greater fiduciary risks

-Greater legal risk


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Legal and Sharia Risks

Legal and Sharia compliance risk

Completeness of Legal

documentation for various contracts

Adherence to AAOIFI Sharisstandards

Role of Sharia supervisory boards/

advisers in mitigating Sharia risk

Live cases

Mistiming in signing of Commodity

Murabaha contracts can lead to lost

income


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RISK I N Murabaha

Title to assets transferred to the

customer at the time of purchase

Usually the customer then providessame or other assets as collateral.

Role of purchasing department is

essential while customer is takingfrom various institutions bankingmurabaha facility.


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END OF PRESENTATION

JAZAKAMUALLAH

murabaha to purchase order by muhammad mohsin ahmed

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