Overview

Definition

of Murabaha
Features of Murabaha
Stages involved in Murabaha
Transaction
Murabaha Documentation
Issues in Murabaha
Bai Muajjal and its conditions
Uses of Murabaha as Mode of Finance
(Local as well as import Murabaha)

Definition of Murabaha
The

word Murabaha has been

derived from the Arabic word
Ribah, which has literary
meaning of profit.

The

Murabaha can be denoted

as Sale With Profit.

Definition of Murabaha

Murabaha is a particular kind of

sale
where
Seller
expressly
mentions the cost it has incurred
on purchase of the Asset(s) to be
sold and sells it to another person
by adding some profit, which is
known to Buyer.

Components of a Valid Sale

SALE

CONTRACT

Offer/Acceptance
Buyer/Seller

SUBJECT
MATTER

PRICE

Existence

Quantified

Ownership

Certain

POSSESSION

Physical
Constructive

Possession
Valuable

Specific
Halal

Purpose
Delivery

Instant and absolute

Unconditional

Features of Murabaha
Murabaha

finance is not a loan

given on interest, it is a sale of
Asset(s) for cash/deferred price.

It

is the obligation of the Seller

to disclose the Cost and Profit to
the Buyer.

Features of Murabaha
Murabaha

Finance can only be used

for the purchase of Fresh Asset(s)
only.

Buy-Back

arrangement
is
prohibited. This means that Murabaha
transaction cannot be executed for the
Asset(s) already purchased by the
Customer.

Features of Murabaha
Murabaha

Transaction can either

be a cash sale (Spot Payment
Murabaha) or a credit sale
(Deferred Payment Murabaha)
or a combination of both.

Payment

of Murabaha Price can

be made in lump sum or in
installments or combination of
both.

Features of Murabaha
It

is a fixed price sale and

normally is done for short term.

The

Murabaha Finance can be

used to meet the working
capital requirements. However,
it cannot be used to meet the
liquidity requirements.

Banking Murabaha
It

is a bunch of contracts completed in

steps which ultimately suffices the
financial needs of the client.

THE

SEQUENCE OF THEIR EXECUTION IS

EXTREMELY IMPORTANT TO MAKE THE
TRANSACTION SHARIAH COMPLIANT.

PHASE I PROMISE TO PURCHASE AND

SELL
The Customer approaches the Bank

for Murabaha Finance and promises

to purchase the Asset(s) from the
Bank which, the Customer will
purchase as an Agent of the Bank.
Master Murabaha Finance
Agreement (MMFA) shall be signed
by the Bank and the Customer at
this stage. This is basically a
Memorandum of Understanding
between two parties.

PHASE II APPOINTMENT OF
AGENT

In the absence of expertise required to

purchase particular kind of Asset(s), the
Bank appoints Customer as its Agent to
buy Asset(s) on its behalf

Types of Agency Agreement

ON ASSET BASIS

ON TIME BASIS

Global Agency

Limited

Specific Agency

Period
Open Ended

PHASE II APPOINTMENT OF
AGENT
The appointment of an Agent for
purchase of Asset(s) for and on
behalf of the Bank and the
ultimate sale of such Asset(s) to
the Customer shall be independent
transactions of each other and
separately documented.
However,

according to Shariah
perspective, it is preferable to
appoint the Agent other than the
Customer.

PHASE II APPOINTMENT OF
AGENT
Agency

Agreement is not the

condition of the Murabaha if the
institution can make direct
purchases from the supplier.

It

is advisable to execute
Agency Agreement because
financial institution does not
have the expertise to identify
the Asset(s) and negotiate an
efficient price.

PHASE II DOCUMENTATION
AGENCY AGREEMENT
This

agreement must contain:

Types (Global/Specific)
Description of Asset(s) to be purchased
Mode of Disbursement of Funds
Roles and Responsibilities of Agent

THIS

DOCUMENTS MUST BE SIGNED

BEFORE PURCAHSE OF ASSET(S) BY THE
AGENT

PHASE III & IV

PURCHAHSE OF ASSETS BY AGENT
The

Customer identifies the Vendor,

selects the Asset(s) on behalf of the
Bank and advise its particulars,
including the Vendors name and
purchase price to the Bank.

If

the supplier is nominated by the

Customer itself, guarantee for good
performance can be demanded
from the Customer.

PHASE III & IV

PURCHASE OF ASSETS BY AGENT
The

Customer takes possession of the

Asset(s) as an Agent of the Bank.

It

is the obligation of the

Customer(Agent) to ensure, at this
stage, that Asset(s) supplied is in
accordance with the given specifications.

To

ensure that a fresh Asset(s) are

purchased by the Agent, Banks staff
should verify actual purchase of Asset(s).

PHASE III & IVDOCUMENTATION

DECLARATION FROM CUSTOMER (AGENT)
The Customer (Agent) will inform the Bank,
through this document, that it has taken the
possession of Asset(s) on behalf of the Bank.
This Transactional Document shall be an
integral part of Master Murabaha Financing
Agreement (MMFA).
This

declaration must contain the statement

that Customer has inspected the Asset(s) to
ensure that its appropriateness and
suitability to the customer.

Phase V

DISBURSEMENT OF FUNDS / PAYMENT TO VENDOR

The Bank has two options regarding for

payment of Purchase Price of Asset(s)
bought by Agent on its behalf.

a)

Direct payment to Vendor by the Bank

(preferable).
Disbursement of Funds to Agents
(Customers) account for onward
payment to Vendor through Cross
Cheque/Pay Order/Demand Draft etc.

b)

PHASE V - DOCUMENTATION
LETTER OF DISBURSEMENT
This

documents is a request from

Customer to disburse funds for payment
to Vendor.

The

disbursement of funds to the

Customer shall be treated as Advance
Against Murabaha.

PHASE VI
MURABAHA EXECUTION STAGE (OFFER
AND ACCEPTANCE)
The

Customer offers to buy the Asset(s)

from the Bank which it has purchased as an
Agent of the Bank.

The

Bank gives the Acceptance to the

Customers Offer.

THIS

IS THE POINT WHERE THE MURABAHA

COMES IN TO EXISTENCE.

PHASE VI
MURABAHA EXECUTION STAGE (OFFER
AND ACCEPTANCE)
It

is obligatory that the point when the

risk of the Asset(s) is passed on by the
Bank to the customer be clearly
identified.

It

is mandatory to determine the

Murabaha Price at this stage, otherwise
Murabaha shall not be valid.

It

is also mandatory to determine the

date of payment of Murabaha Price
rendering the Murabaha to be valid.

PHASE VI
MURABAHA EXECUTION STAGE
DOCUMENTATION
a)

OFFER FOR PURCHASE

The Customer offers to buy the Asset(s)
purchased by it as an Agent.
This documents should be signed after
actual possession of Asset(s) by the
Customer but before consumption of
such Asset(s).
This Transactional Document shall be
an integral part of Master Murabaha
Financing Agreement (MMFA).

PHASE VI
MURABAHA EXECUTION STAGE
DOCUMENTATION
b)

BANKS ACCEPTANCE OF OFFER

Bank accepts the Customers offer and

sells the Asset(s) purchased by
Customer(Agent) on its behalf on
Murabaha Price to be paid on agreed
future date.
The Asset(s) must be in Banks
possession by either way, i.e. physical
or constructive.

i.
ii.

PHASE VI
MURABAHA EXECUTION STAGE
DOCUMENTATION
This document must contain

Murabaha Price (Cost+Profit)

Repayment Date

PHASE VI
MURABAHA EXECUTION STAGE
DOCUMENTATION
c)

PAYMENT SHEDULE SUMMARY

The customer has three options to pay

the Murabaha Price.
Lump-sum payment
Installment Payment
Partly instant and partly in installment

i.
ii.
iii.

This documents is required if the

Customer wishes to pay the Murabaha
Price in installments

PHASE VI
MURABAHA EXECUTION STAGE
DOCUMENTATION
d.

DEMAND PROMISSORY NOTE

After execution of Murabaha, the

Murabaha Price will become the Debt
(Dyan) on the Customer.
This document is Customers
acknowledgement to the debt amount
and its promise to pay the debt.

PHASE VII

PAYMENT OF MURABAHA PRICE BY CUSTOMER

Customer

will pay the Murabaha Price to

the Bank on the agreed date.

The

customer is not entitled to any

reduction in Murabaha price in case of
early payment of Murabaha Price.

In

same way Bank can not increase the

Murabaha Price if the Customer defaults or
make delayed payment.

Issues in Murabaha
Security:

The institution may ask

the customer to furnish a security
to its satisfaction for prompt
payment of the Deferred
Murabaha price.
It is also permissible that the sold
Asset(s) itself is given to the seller
as a security.
It is preferable not to take Interest
bearing instruments as securities.

Issues in Murabaha
Early

Payment: If the customer

makes early payment and there is
no commitment from the
institution in respect of any
discount in the price of Murabaha,
than the institution has the sole
discretion in allowing them the
rebate.
Under Murabaha the price is fixed,
therefore, it is recommended that
issue should be brought in the
knowledge of Sharia'h advisor

Issues in Murabaha
Penalty

on late payment:
Technically there cannot be any
change in price of Murabaha.
However, to deal with dishonest
clients who deliberately are
delaying payments, Bank may
demand penalty

Issues in Murabaha
Rollover

is also not allowed.

Rollover in a Murabaha Transaction
would imply that payment of earlier
Murabaha Price by executing new
Murabaha on thesame asset which
is not allowed.

Issues in Murabaha
Guaranteeing

a Murabaha:
Bank may seek a guarantor to the
transaction to ensure deferred
payments are actually received.
The guarantor cannot charge a
fee from the the original client.

Bai Muajjal
Bai

Muajjal is a sale of goods with

deferred payment.
All those assets which do not come
under capital and where quality
can be compensated by price, can
be sold for deferred payment at a
higher price.

Conditions of Bai Muajjal

The price to be paid must be agreed and fixed at the time of the
deal. It may include any amount of profit without qualms about
riba.

Complete/total possession of the object in question must be given

to the buyer, while the deferred price is to be treated as debt
against him.

Once the price is fixed, it cannot be decreased in case of earlier

payment nor can it be increased in case of default.

In order to secure the payment of price, the seller may ask the
buyer to furnish a security either in the form of mortgage or in the
form of an item.

If the commodity is sold on installments, the seller may put a

condition on the buyer that if he fails to pay any installment on its
due date, the remaining installments will become due immediately.

USE OF MURABAHA IN IMPORTS

Agency

Agreement must be signed before

opening of L/C in case of imports.
All costs/charges (e.g SWIFT charges, L/C
Opening commission) shall be included in
the cost of Murabaha Asset.
Offer and Acceptance may be signed when
the Asset(s) arrived at port.
In case of Usance L/C, Murabaha execution
stage is offer and Acceptance stage
even though the payment is made after
usance period.

USE OF MURABAHA IN EXPORTS

In

case of Pre-shipment, normal procedure

as adopted in local Murabaha shall be
strictly followed.

In

case of post-shipment, Murabaha can

not be executed for goods already
exported. However, Murabaha can be
executed for fresh purchases required for
next shipment against assignment of
receivables for first shipment.