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Sale Contract /Murabaha

Center of Islamic FinanceCOMSATS Institute of Information TechnologyLahore Campus

Adopted from open source lecture of Mufti Najeeb Khan.

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Murabaha is a particular kind of sale where the seller discloses its cost and profit charged thereon.

The price in this sale can be both on spot and deferred.

MURABAHA

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Murabaha is a particular kind of sale where the seller discloses its cost and profit charged thereon.

Musawima is a sale on agreed price without referring to the first price on which the seller has purchased.

Difference between Murabaha & Musawima

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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.

BANKING MURABAHA

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It is called Murabaha to the purchase orderer .

It is a bunch of contracts completed in steps and ultimately suffices the financial needs of the client.

The sequence of their execution is extremely important to make the transaction Shariah compliant.

BANKING MURABAHA

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As it is a kind of sale, there must be a seller and buyer and some thing 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 needs of the client.

SCOPE OF MURABAHA

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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.

SCOPE OF MURABAHA

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Step by Step Murabaha

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Stage One (a) for Murabaha financing.

• Client approach the bank for facility through Murabaha.

1- Promise stage

Facility approved

Bank Client

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Stage One (b) for Murabaha financing.

• Client and bank sign an agreement to enter into Murabaha.

1- Promise stage

Murabaha Facility

AgreementMOU

Bank Client

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Stage One (c) for Murabaha financing.

• Client submit the purchase requisition to the bank.

1- Promise stage

purchase requisition /Promise to the bank.

Bank Client

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Stage Two (a) for Murabaha financing.

• Client appointed as agent to purchase goods on bank’s behalf

2- Agency stage

Bank ClientAgreement to Murabaha

Agency Agreement

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Stage Two (b) for Murabaha financing.

• Bank gives money to supplier through client’s account for purchase of goods.

2- Agency stage

Agency Agreement

Islamic Bank

Bank ClientAgreement to

Murabaha

Disbursement to the Supplier

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Stage three for Murabaha financing.

• Client purchases goods on bank’s behalf and takes their possession.

3. Acquiring Possession

Client purchases goods and takes possession

Transfer of Risk Vendor

Banck

Client

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Stage four (a) for Murabaha financing.

• Client makes an offer to purchase the goods from bank.

4. Execution of Murabaha

Bank

Offer to purchase

Client

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Stage four (b) for Murabaha financing.

• Bank accepts the offer and sale is concluded.

4. Execution of Murabaha

Murabaha Agreement

+ Transfer of Title

Bank Client

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Stage four (b) for Murabaha financing.

• Client pays agreed price to bank according to an agreed schedule. Usually on a deferred payment basis (Bai Muajjal).

4. Execution of Murabaha

Bank ClientPayment of Price

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MurabahaGENERAL MECHANICS

VENO

Agreement CUSTOMERISLAMIC

BANKVENDOR

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• The customer approaches the Bank with the request for financing.

• The Bank purchases and receives title of ownership from the vendor.

• The Bank makes payment to the vendor.• The Bank transfers the title over to the

customer upon payment.• The customer makes payment up-front or on a

deferred basis.

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Rescheduling is allowed but repricing is not allowed.

Rollover is also not allowed.

ISSUES IN MURABAHA

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Risk Management IN

MURABAHA

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Risk Dimensions

Banking Risks

Credit

Credit Liquidity

Prising risk

Market

Foreign Exchange

Solvency

Operational

Islamic Banks also face-Additional asset risk-Greater fiduciary risks-Greater legal risk

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