C,x7ik y7ku`w2History of Islamic Banking in Pakistan

Efforts to Islamize the economy of Pakistan started in the mid 60s. However a significant
attempt was made in the mid 80s1 to convert the banking system to an Islamic banking system.
The Banking Companies Ordinance (BCO, 1962) was amended to accommodate non-interest
based transactions and the industry was given a specific timeline to convert to the non-interest
based system. In early 90s, the whole exercise was challenged in the Federal Shariat Court
which declared some products and processes being used by the banking system un-Islamic.
Prior to the re-launch, to study the experience of different countries in Islamic banking, a
delegation from Ministry of Finance (MoF), led by Advisor to Finance Minister, Dr. Tariq
Hassan visited Malaysia, Egypt and Saudi Arabia in September 20012. Based on the
recommendations of this delegation and the past experience of SBP, the policies for promotion
of Islamic banking were formulated. Accordingly, State Bank of Pakistan issued detailed criteria
for setting up of Islamic banks in December 2001.
Al-Meezan Investment Bank Limited applied under the criteria issued by SBP to convert itself
into an Islamic commercial bank. They were issued a license in the name of Meezan Bank
Limited to operate as full-fledged Islamic bank in January, 20023.
Current Status of Islamic Banking Industry in Pakistan
As at end of the year 2003 only one bank operated as a full-fledged Islamic bank and three
conventional banks were operating Islamic banking branches. Today there are 6 full fledge
licensed Islamic banks (IBs) and 12 conventional banks have licenses to operate dedicated
Islamic banking branches (IBBs).4
The total assets of the Islamic banking industry are over Rs. 225 billion as of 30th June, 2008
which accounts for a market share of 4.5% of total banking industry assets. The market share of
deposits stands at 4.2%. Total branch network of the industry comprises of more than 330
branches with presence in over 50 cities & towns covering all the four provinces of the country
and AJK5.

1
Aurangzeb Mehmood, “Islamisation of Economy in Pakistan: Past, Present and Future” Islamic Studies.

2 Strategic Plan for Islamic Banking Industry of Pakistan, by Islamic Banking Department of State Bank of Pakistan

3 www.meezanbank.com

4 PAKISTAN ISLAMIC BANKING: PAST, PRESENT AND FUTURE OUTLOOK Bu Dr. Shamshad Akhtar (Governor State Bank of Pakistan, 11 September 2007)

1
Islamic Banking Products
Islamic Banking Institutions of Pakistan are offering a wide range of compliant products &
services. Murabaha is dominating the financing
portfolio of Islamic Banking Institutions (IBIs),
Similarly, Ijara, Musharaka and Diminishing
Musharaka are also used noticeable share in total
financing of IBIs. However, Mudaraba, Salam
and Istisna portfolios still needs to be triggered.
Murabaha
Originally, Murabaha was a particular type of Source: Islamic Banking Bulletin September 2009

sale and not a mode of financing. The ideal

modes of financing according to Shariah are
Mudaraba or Musharaka. However in the perspective of the current economic circumstance there
are certain practical difficulties in using Mudaraba and Musharaka as instruments in every type
of financing. Therefore, the contemporary Shariah experts have allowed, subject to certain
conditions, the use of Murabaha on a deferred payment basis as a mode of financing.
MURABAHA is a particular kind of sale in which seller honestly discloses the cost incurred on
the sale of commodities to be sold and sell to the buyer at disclosed cost plus mutually agreed
profit margin ratio. The agreed profit ratio varies from bank to bank. MURAHABAH is being
used to purchase any tangible asset: Real Estate, Stocks, Machinery, Equipments, furniture,
building materials, vehicles or any identifiable and tangible goods which are in Shariah
complains. More than 60% of Islamic Financing transactions all over the world are through
Murabaha financing.
Scope of Murabaha
• Financing of purchasing commodities and goods from the local markets
• Financing import and export transactions
• Financing fix assets (machines and equipments)
• Financing of working capital (purchasing feedstock used for production)
• Financing construction and installations material purchases
• Financing purchasing of real estate (land and building)
5
www.sbp.org.pk/ibd
2
The payment of Murabaha price may made
• At spot at time of sale
• In installments
• In lump Sum (Bullet Payment) after a period of time
Difference between Murabaha and Sale
A simple sale in Arabic is called Musawamah - a sale without disclosing or referring to the cost
of goods sold. However when the cost price is disclosed to the client, it is called Murabaha. A
simple Murabaha is one where there is cash payment and Murabaha Muajjal is one on deferred
payment basis.
The Murabaha transaction does not come into existence by merely replacing the ‘interest’ by the
words "profit" or "mark-up". Actually, murabahah as a mode of financing has been allowed by
the Shariah scholars with some conditions. Unless these conditions are fully observed, Murabaha
is not permissible. In fact it is the observance of these conditions which can draw a clear line of
distinction between the interest-bearing loan and the transaction of Murabaha. If these conditions
are not observed, the transaction becomes invalid according to Shariah.
Basic Features of Murabaha Financing
1. Murabaha is not a loan given on interest. It is a sale of a commodity for a deferred price
which includes an agreed profit added to the cost.
2. Being a sale and not a loan, Murabaha should fulfill all the conditions necessary for valid
sale.
3. The financier must have a good title to the commodity before he sells it to his client.
4. The commodity must come into possession of the financier, whether physically
constructively, in the sense that the commodity must be in the risk of the financier even
though the risk may be for a short period.
5. The best way for Murabaha according to Shariah is that financier himself purchases the
commodity and keeps it in his own possession or purchases the commodity through a
third person appointed by him as his agent before he sells it to the customer. However, it
is also allowed that the financier may make the client himself his agent to buy the
commodity on his behalf. In this case the client first purchases the commodity on behalf
of his financier and takes possession as such. Thereafter, he purchases the commodity
from the financier for a deferred price. His possession of the commodity in the first
3
 instance is in his capacity as an agent of the financier. In this capacity he is only a trustee
while the ownership vests in the financier and the risk of the commodity is also borne by
the financier as a logical consequence of the ownership. However, when the client
purchases the commodity from the financier, the ownership as well as the risk is
transferred to the client.
6. As mentioned earlier, the sale cannot take place unless the commodity comes into the
possession of the seller but the seller can sign an agreement to sell even when the
commodity is not in his possession. The same rule is applicable to Murabaha.
Process Flow and Shariah Compliance
In the light of the aforementioned principles, financial institutions can introduce the
Murabaha mode of financing by adopting the following procedure:
Firstly, The client and the institution sign an over-all agreement whereby the
institution promises to sell and the client promises to buy the
commodity on an agreed ratio of profit added to the cost.

Secondly, The institution appoints the client as his agent for purchasing the
commodity on his behalf and an agreement of agency is signed by both
the parties

Thirdly, The client purchases the commodity on behalf of the institution and
takes its possession as an agent of the institution

Fourthly, The client informs the institution that he has purchased the commodity
on its behalf and at the same time makes an offer to purchase the
commodity from the institution.

4
 Fifthly, The institution accepts the offer and the sale is concluded whereupon
the ownership as well as the risk of the commodity is transferred to the
client.

All the abovementioned five stages are necessary to affect a valid Murabaha sale. The most
essential element of the transaction is that the commodity must remain in the risk of the
institution during the period between the third and the fifth stage. This is the only feature of
Murabaha which can distinguish it from an interest-based transaction. Therefore, it must be
observed with due diligence otherwise the Murabaha transaction becomes invalid according to
Shariah.
1. It is also a necessary condition for the validity of Murabaha that the purchased from a
third party. The purchase of the commodity from the client himself on a buy agreement is
not allowed in the Shariah. Thus Murabaha based on 'buy-back' agreement is more than
an interest-based transaction.
2. The abovementioned procedure of the Murabaha financing is a complex transaction
which the parties involved have different capacities different stages as follows:
(a) At the first stage, the institution and the client agree to sell and purchase a commodity
in the future. This is not an actual sale. It is only a promise to affect a sale in future on a
Murabaha basis. Therefore, at this stage the relationship between the institution and the
client is that of a promisor and a promisee.
(b) At the second stage, the relationship between the parties is that of a principal and
agent.
(c) At the third stage, the relationship between the institution and the supplier is that of a
buyer and seller.
(d) At the fourth and fifth stages, the relationship of buyer and seller comes into
existence between the institution and the client and since the sale is affected on a deferred
payment basis the relationship of a creditor and debtor also emerges between them
simultaneously. All these capacities must be kept in mind and must come into operation
with consequential effects each at its relevant stage and these different capacities should
never be mixed up confused with each other.
5
 3. The institution may ask the client to furnish security to its satisfaction for the prompt
payment of the deferred price. It may also ask him to sign a promissory note or bill of
exchange but it must be after the actual sale takes place i.e. at the fifth stage mentioned
above. The reason is that the promissory note is signed by a debtor in favour of his
creditor but the relationship of debtor and creditor between the institution and the client
begins only at the fifth stage whereupon the actual sale occurs between them.
4. In the event of default by the buyer (client) in respect of the payment of the purchase
price on the due date, the purchase cannot be increased. However, if he has undertaken
in the agreement to pay an amount for a charitable purpose, as mentioned in clause 7 of
the rules of Bai'Mu'ajjal, he shall be liable to pay the amount undertaken to be paid by
him. However, the amount so recovered from the buyer shall not form part of the income
of the seller/ the financier. The financier is bound to spend it for a charitable purpose on
behalf of the buyer (client).
Basic mistakes in Murabaha Financing
Some basic mistakes that can be made in practical implications of the concept are as follows:
1. The most common mistake is to assume that Murabaha can be used for all types of
transactions and financing. This mode can only be used when a commodity is to be
purchased by the customer. If funds are required for some other purpose Murabaha
cannot be used.
2. The document is signed for obtaining funds for a specific commodity and therefore it is
important to study the subject matter of the Murabaha.
3. In some cases, the sale of commodity to the client is affected before the commodity is
acquired from the supplier. This occurs when the various stages of the Murabaha are
skipped and the documents are signed all together. It is to be remembered that Murabaha
is a package of different contracts and they come into play one after another at their
respective stages.
4. It is observed in some financial institutions that Murabaha is applied on already
purchased commodities, which is not allowed in Shariah.
Murabaha Documents
There are a number of documents involved in a Murabaha financing transaction. The most
essential of these documents are:
6
  Master Murabaha Finance Agreement
 Agency Agreement
 Purchase Requisition for Purchase of the goods
 Detail of Goods to be purchased (To be attached to the purchase Requisition)
 Declaration (Confirmation of Goods Purchased, Offer to Purchase and Institution’s
Acceptance)
 Schedule Payments for Contract Price
 Schedule of Security
1. Master Murabaha Finance Agreement
It’s an agreement between the client and the Bank whereby the client agrees to purchase goods
from the Bank from time to time as per the terms and conditions of this agreement.
This is an overall facility agreement under which various Sub-Murabaha may be executed from
time to time. Hence it needs to be signed once at the time the facility is sanctioned.
MURABAHA FACILITY AGREEMENT (this "Agreement") is made at_____on ___ day of
_____ by and BETWEEN ____________________, (hereinafter referred to as the "Client"
which expression shall where the context so permits mean and include its successors in interest
and permitted assigns) of the one part AND______________________________, (hereinafter
referred to as the "Institution" which expression shall where the context so permits mean and
include its successors in interest and assigns) of the other part.
IT IS AGREED BY THE PARTIES as follows:
1. PURPOSE AND DEFINITIONS
1.01 This Agreement sets out the terms and conditions upon and subject to which the Institution
has agreed to purchase the Goods from time to time from the Suppliers and upon which the
Institution has agreed to sell the same to the Client from time to time by way of Murabaha
facility.

7
2. SALE AND PURCHASE OF THE GOODS
2.01 The Institution agrees to sell the Goods to the Client to a maximum amount of
Rs____________ and the Client agrees to purchase the Goods from the Institution from time to
time at the Contract Price. Upon receipt by the Institution of the Client's Purchase Requisition
advising the Institution to purchase the Goods and making payment therefore, the Institution
shall acquire the Goods either directly or through the Agent. The payment for such goods shall
be made by the institution directly to the Supplier on submission of Purchase Advice by the
client/agent….
2.02 Upon receipt of purchase of Goods by the Institution, directly or through an Agent, from
the Supplier, the Goods shall be at the risk and cost of the Institution until such time that these
Goods are sold to the Client…….
2.03 After the purchase of Goods by the Institution, the Client shall offer to purchase the Goods
from the Institution at the Contract Price….
3. SECURITY
As security for the indebtedness of the Client under this Agreement, the Client shall furnish to
the Institution collateral(s)/security (ies)…..
4. FEES AND EXPENSES The Client shall pay to the Institution on demand within 15 days of
such demand being made, all expenses (including legal and other ancillary expenses) incurred by
the Institution in connection with the negotiation, preparation and execution of the Principal
Documents and of amendment or extension of or the granting of any waiver or consent under the
Principal Documents.
5. PAYMENT OF CONTRACT PRICE
5.01 All payments to be made by the Client under this Agreement shall be made in full, without
any set-off, roll over or counterclaim whatsoever, on the due date…..
6. REPRESENTATIONS AND WARRANTIES
a. The Client warrants and represents to the Institution that:
b. The execution, delivery and performance of the Principal Documents by the Client will not
(i) Contravene any existing law, regulations or authorization to which the Client is subject
(ii) Result in any breach of or default under any agreement or other instrument to which the
Client is a party or is subject to, or

8
c. The financial statements submitted together with the notes to the accounts and all contingent
liabilities and assets that are disclosed therein represent a true and fair financial position of the
business and to the best of the knowledge of the client, its directors and principal officers, there
are no material omissions and/or mis-repsentations.
d. It shall inform the Institution within business days of an event or happening which may have
an adverse effect on the financial position of the company, whether such an event is recorded in
the financial statements or not as per applicable International Accounting Standards.
7. UNDERTAKING
The Client covenants to and undertakes with the Institution that so long as the Client is indebted
to the Institution in terms of this Agreement:
(a) It shall inform the Institution of any Event of Default
(b) It shall provide to the Institution, upon written request, copies of all contracts, agreements
and documentation relating to the purchase of the Goods;
(c) Except as required in the normal operation of its business, the Client shall not, without the
written consent of the Institution, sell, transfer, lease or otherwise dispose of all or a sizeable part
of its assets, or undertake or permit any merger, consolidation, or re organization which would
materially affect the Client’s ability to perform its obligations under any of the Principal
Documents;
(g) It shall forthwith inform the Institution:
(a) The financial condition of the Client;
(b) Business or operations of the Client; and
(c) The Client’s ability to meet its obligations when due under any of the Principal Documents;
Other clause including in this agreement are:
Penalty, Indemnities, set off, and Force Majeure and the signature of the witnesses on the behalf
of institution and client.
2. Agency Agreement
The client is appointed by the Bank as its agent to purchase goods. This agreement needs to be
signed once between the client and the bank.
The disbursement of funds is done under this agreement. Clients need to fill out the List of
Assets which it will purchase.

9
 Agency Agreement
With reference to the Murabaha Facility Agreement dated _______________ , we hereby
confirm our agreement to appoint you as our Agent to acquire for our account and benefit goods
of the description to be specified in the purchase requisition which shall be issued from time to
time, under the following terms and conditions;
1. As an Agent of the Institution, you will be responsible to receive the Goods directly from the
Supplier (s) from time to time in terms of Purchase Requisition(s) to be duly endorsed by the
Institution and provide us a declaration confirming acquisition thereof, alongwith a statement
containing relevant details including place of storage.
2. The bank shall prepare a Pay Order/Cross cheque, etc in the name of Supplier that will be
handed over to the Agent. The supplier will issue an invoice in the name of Bank - Account
Client (e.g. ‘1st Islamic Bank – ABC Company’).
3. In case of failure on your part to:-
a) Acquire goods in terms of this agreement and to refund, in consequence, the amount paid by
us (the Institution) therefore, and/or
b) Repay the amount, if any, due from you upon a notice of revocation, if any, served by you in
the manner provided hereunder; you shall become liable to pay a penalty to the institution by
credit to a special Account, separately maintained by the institution, an amount which shall be
5% over the rate announced by SBP for providing short term accommodation to commercial
banks, as on the date of such default by you. This amount will be calculated on the entire amount
due from you, under this Agency Agreement and for the entire period for which the default
subsists. The amount of such penalty shall be utilized by the institution only for the purposes of
charity, in its absolute discretion.
4. The Institution shall have the authority, in its absolute discretion to refuse the disbursement of
funds or to revoke this Agency Agreement at any time., subject to a notice in writing served
given at least 07 days prior to revocation.
5. You may revoke this Agency Agreement by giving a notice in writing of at least 07 days prior
to the date of intended revocation, provided that any amount due by you to the Institution shall
become payable immediately and until such time that any such amount due from you has been
discharged in full, this agreement shall not be deemed to have been revoked.

10
6. This Agency Agreement shall remain in force until revoked and shall be governed by the
prevailing laws of Pakistan and the Murabaha Facility Agreement dated _______________. Any
dispute between the parties shall be submitted to a Court/Tribunal of competent jurisdiction in
__________.
Kindly signify your acceptance of the foregoing terms and conditions by signing the duplicate.
For and on behalf of (insert name of the Institution)
AUTHORISED SIGNATORY OF THE INSTITUTION
AGREED AND ACCEPTED
For and on behalf of [insert name]
___________________________________
AUTHORISED SIGNATORY OF THE AGENT
WITNESSES:

1. ________________
2. ________________
3. Purchase Requisition
PURCHASE REQUISITION FOR PURCHASE OF THE GOODS
MURABAHA FACILITY AGREEMENT DATED
S.No.___________
Date: ___________
To:
___________________________ [Insert name and address of the Institution]
Dear Sirs,
(1) Please refer to the Murabaha Facility Agreement dated [______] (the "Agreement") between
[insert name of the Client] (the "Client") and [insert name of the Institution] (the "Institution")
(2) All terms defined in the Agreement bear the same meanings herein.
(3) The Client hereby requests you to purchase the Goods from the Suppliers as per the
provisions of the Agreement as follows:
(a) Goods as detailed in Murabaha Document # 3/2:
(b) Cost Price: ____________________
(c) Value Date: ___________________

11
(4) Please make arrangements to pay the Cost Price to the account of _______________on the
Value Date in immediately available funds.
(5) All the terms and conditions of the Agreement shall form an integral part of this Requisition.
Yours faithfully,
For and on Behalf of the Client
______________________
INSTITUTION’S INSTRUCTIONS
No._____________
Date: _____________
Dear Sir,
You are hereby instructed to execute the aforesaid Purchase Requisition for and on our behalf in
the manner, to the extent and for the Goods stipulated therein.
For and on Behalf of
______________________ (Insert Institution’s name)
DETAILS OF GOODS TO BE PURCHASED
(To be attached to Purchase Requisition)
Name of Supplier : _____________________ Date:____________
Address: ______________________________________________________________________
4. R E C E I P T
Received with thanks Pay Order/Cross cheque, in the name of Supplier from______________
branch, amounting to Rs.______ (Rupees ___ only) for the purchase of goods in respect of
which a Quotation dated______has been issued by M/S __________.
In the event of failure on the part of the Supplier to supply the said goods within the period
specified in the Purchase Requisition, I/We undertake and agree to refund/reimburse the full
amount of Rs._____________ and all cost and consequences under and in terms of the Agency
Agreement.
For and on behalf of [Insert name of the Agent)
__________________ (Authorized Signatory)
Date: ______________________

5. Declaration:

12
Declaration is to be signed by the customer immediately after it has purchased the goods. This
document establishes the actual sale transaction, i.e. transfer of ownership of goods from the
Bank to the customer.
(Part- I) CONFIRMATION OF GOODS PURCHASED
(Part-II) OFFER TO PURCHASE
(Part-III) INSTITUTION’S ACCEPTANCE

6. SCHEDULE OF PAYMENTS OF CONTRACT PRICE

Payment Date Installment Amount

7. SCHEDULE OF SECURITY

Description of Security Nature of Charge

ISSUES IN MURABAHA
Default Case
In the case of default by the buyer in the payment of price at the due date, the price cannot be
increased. However if he has undertaken, in the agreement to pay certain amount for a charitable
purpose, he shall be liable to pay the amount undertaken by him. But this recovered amount from
the buyer will not be considered penalty or compensation, therefore it will not account to
institutions income. Institution is bound to spend it for a charitable purpose on behalf of the
buyer.
Rebates in Early Payment
If the customer makes the payment before the due date and there is no commitment that he
would gain any discount in the price of Murabaha. Then it is permissible for bank to give any
rebate to the client.

13
Rises in Prices and Change in Assets
If there is a rise in prices and the amount escalates for which financing is availed then the
transaction can only 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. Change of Asset(s) in the agency agreement can be done with mutual consent. If
Agency Agreement is for specific Asset(s) then new agreement is required for changed Asset(s).
Murabaha with Related Parties
In case of Murabaha, the Vendor and the Customer must be independent to each other. Banks are
not allowed to enter into a Murabaha Transaction where Vendor and Customer are associated
parties. Parties are considered to be related parties if one party has 33% or more
shares/ownership in the business of other party.
Delays in the Supply from 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 the cost of goods.
Rollover in Murabaha
Rollover in a Murabaha Transaction would imply that payment of earlier Murabaha Price by
executing new Murabaha. Rollover in Murabaha is not possible since each Murabaha transaction
is for the purchase of a particular asset.
Purchase Evidence
The customer is required to submit purchase evidence and declaration. The purchase evidence
must confirm that customer as an agent has purchase the goods after agency agreement. The
evidence may be in the form sale invoices, delivery orders or any other receipts etc. In some case
the customers are allowed to submit a purchase summary.

14
Risk Management
Risks Solution
Agency Risk Pre-inspection and direct payment to the vendor.

Ownership Transfer/Asset Risk Takaful of goods during transit and induce

customer to submit declaration immediately after
the purchase of goods.
Default Risk Obtain Shariah compliant collateral and adapt
staggered payments.
Price Risk Time lag between purchase and offer acceptance
should be minimum.
Liquidity Risk Make separate pools for different maturities
considering their different maturity dates.
Profitability Risk A charity may be imposed to discourage a delay
to make Murabaha repayments.
Shariah Non-Compliance Risk Ensure that relevant staff has appropriate
training and has proper knowledge of Shariah
principles. Checklist of the sequence may be
followed.

Legal Risk Proper documentation and timely checking is

required.

Accounting Treatment of Murabaha Transactions

There may be three different cases for payment of Murabaha pricing.
I. Bullet Payment
If Murabaha price is paid in one bullet payment, price can simply be calculated as following
Murabaha Price = Principal+ Principal x Profit Rate x No. of days
= 1,000+ (1,000*.10*1) = 1,100
ii. Payment in Equal Installments
In this case, each payment is comprised of a portion of principal & profit. The payment is
calculated by using IRR (Internal Rate of Return) formula
Installment = [(principal x rate)/ (1-(1/ (1+rate) ^n)]
= [(1,000*.10)/ (1-(1/1.10) ^12)
=
Murabaha Price = Installment x n
iii. Unequal installments
15
In such a way, profit part of the selling price is paid over the total tenor of the transaction,
whereas the principle amount is paid at maturity. Price is calculated as following:
. Murabaha Price = Principal amount+ Principal x Profit rate x No. of days
. Interim Installment = Principal x Profit rate x No. of days (days per period)

Transaction Recording
Pre-adoption Post-adoption

1) Murabaha Financings were recorded at the 1) Funds disbursed for purchase of goods are
time of disbursement of funds. recorded as ‘Advance for Murabaha’. On
culmination of Murabaha i.e. sale of
2) Goods purchased but remaining unsold at the
goods to customers, Murabaha Financings
balance sheet date were recorded as
are recorded at the deferred sale price net
‘Advance against future Murabaha’.
of profit payment.

3) Profit for the Murabaha transaction was

2) Goods Purchased but remaining unsold at the
recorded from the date of disbursement.
balances sheet date are recorded as
Inventories.

3) Profit for the period from the date of

disbursement to the date of culmination of
Murabaha is recognized immediately after
the date of culmination of Murabaha...

16
Case Study for Murabaha
Below is the case study for the understanding of Murabaha transactions carried out at ABC Bank
in various scenarios:
Example Amount in Rs. /%
Purchase price/Cost/Principal 1,000
Profit Rate 10%
Tenure One year
Total profit on transaction 100
Sale price (Contract price) 1,100
Date of Disbursement to supplier/customer January 01, 2010
Date of Culmination of Murabaha Transaction January 15, 2010
Date of Maturity of Murabaha December 31, 2010

A-When there is bullet payment of profit and Cost (Principal) at the end of the period:
1) At the time of payment to the client for the purchase of goods on behalf of bank or directly to
the supplier by the bank the transaction will be accounted for as follows:
January 01, 2010
Dr Advance against Murabaha (B/S Asset side)1,000
Cr Pay Order / Party Account (B/S Liability side) 1,000
2) At the Culmination of Murabaha i.e. at the time of sale of goods to the customers with
signing of Declaration by the bank and the client following entries would be passed:
January 15, 2010
Dr Murabaha Financing 1,000
Dr Unearned Murabaha Profit Receivable 100
Cr Advance against Murabaha 1,000
Cr Deferred Murabaha Income 100
3) Booking of Accrual of profit@ 10% from the date of disbursement to the date of
culmination, the following entry would be passed. [(1000 x 10%) x 15 / 365]:
January 15, 2010
Dr Deferred Murabaha Income 4.10
Dr Murabaha Profit Receivable 4.10
Cr Income on Murabaha Financing 4.10
Cr Unearned Murabaha Profit Receivable 4.10

17
4) Booking of Accrual of profit@ 10% for remaining days of the month, the following entry
would be passed. [(1000 x 10%) x 16 / 365]:
January 31, 2010
Dr Deferred Murabaha Income 4.39
Dr Murabaha Profit Receivable 4.39
Cr Income on Murabaha Financing 4.39
Cr Unearned Murabaha Profit Receivable 4.39
And so on this entry will be passed at the end of EACH month till maturity for the accrual of
profit.
5) On Maturity of Murabaha transaction i.e. on December 31, 2007 and at the time of
receiving of final payment following entry would be passed:
December 31, 2010
Dr Party Bank A/c 1,100
Cr Murabaha Financing 1,000
Cr Murabaha Profit Receivable 100
Treatment for Inventory
If goods purchased for Murabaha remain unsold on the reporting date they are shown as
“Murabaha Inventory” in Other Assets.
Following are possible scenario:
Bank is holding assets for future sale to its customers against a promise
The Goods are imported as Bank’s agent and are not sold to the importers
Any other reason due to which the goods remain unsold

18
Step by Step Murabaha (Bank Islami)

1. Customer and Bank Islami sing an agreement to enter Master Murabaha Agreement
(MMA).
MMA
Bank Islami Customer

2. Bank Islami makes the payment for the goods to be purchased.

MMA
Bank Islami Customer

Transfer of risk

Supplier
Transfer of Money

3. Customer pays agreed price to Bank Islami according to agreement, usually on credit based
payment for the goods. Delivery of goods

Bank Islami Customer

Payment

If Customer acts as an agent on the behalf of Bank Islami, then

MMA

Bank Islami Customer

Agency Agreement

Customer as agent of Bank Islami purchases the goods from supplier and bank Islami pays the
price to the supplier. Risk is transfer to the bank.

MMA

Bank Islami Agency Agreement Customer

Delivery of Goods

Transfer of Payment

Supplier
19
 Customer (agent) informs Bank Islami about the purchase of goods and at the same time he/she
makes an offer to purchase the goods.

Offer to Purchase
Bank Islami Customer

Bank Islami accepts the offer and sale is concluded. Ownership, possession and risk are
transferred to the customer. And customer makes the payment.

Offer to Purchase
Bank Islami Customer

Ownership, Risk

Payment

Murabaha

Relationsh Master Murabaha Risk

ip Agreement Management

Promisor &
Hamish
Promisee
Jiddiyyah
Agency Agreement

Principal and
Agent Takaful
(Insurance)
Purchase
Requisition SECURITY
(Yes)
Hypothecation of assts

Seller & Buyer Sale Agreement Pledge of goods and or marketable

securities

Lien on the deposit

Delivery of Mortgage on immoveable properties

Debtor &
Creditor Goods 20 Bank guarantees and personal
guarantees.
 Basic Rules for Murabaha

Basic Rules for Murabaha

Price Possession
Subject Matter

Quantified Physical Constructive

Existence
Certain
Ownership

Possession Sale must be

Identifiable
Instant and absolute
Valuable Specific Unconditional

Breakup of Financing

21
Financial Highlights of Murabaha in Islamic Banking

BANKS YEAR TOTAL MURABAHA % OF REVENUES MURABAHA % OF

MURABAHA
ALBARAKA Assets FINANCING FINANCING SALES Murabaha
Sales
2009 29304960 9667814 32.99% 2555597 1349821 52.82%
2008 24197826 8562432 35.38% 1764924 1090725 61.80%
2007 22077113 6994844 31.68% 1493035 764279 51.19%
MEEZAN
BANK
2009 12418173 16645275 13.40% 10102060 5090510 50.39%
4
2008 85276070 14590314 17.11% 6803213 4689554 68.93%
DUBAI ISLAMIC
BANK
2009 35368894 2430861 6.87% 3047195 1102381 36.18%
2008 32050078 2559791 7.99% 2723796 905896 33.26%
2007 21308247 2205258 10.35% 1119716 308965 27.59%
EMIRATES GLOBAL BANK
2009 19762450 3453856 17.48% 1914228 220904 11.54%
2008 16537387 3150693 19.05% 1060376 18135 1.71%
2007 8941475 1152289 12.89% 381172 139730 36.66%

22
23
Meezan Islamic Bank
Short Term Financing
Underlying Islamic Mode Murabaha
Type of Product Corporate/SME
Basis for Pricing KIBOR Based/Risk Rating/Bank's
Liquidity Position
Minimum Financing Limit No
Maximum Financing Limit as per SBP Prudential Regulations (PRs)
Minimum Tenors 7 days
Maximum Tenors 1 Year
Target Customers Corporate
Security/Collateral Required Cash / MOTD /Letter of Hypothecation/Pledge

ALBARAKA ISLAMIC BANK

Murabaha Finance
Underlying Islamic Mode Murabaha
Type of Product Corporate, SME,
Basis for Pricing KIBOR based fixed rates for each transaction.
Minimum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Maximum Financing Limit As per PRs and subject to bank's internal
assessment for allocation of limit
Minimum Tenors 90 days
Maximum Tenors 1 Year
Target Customers All customers falling under corporate, SME sector
Security/Collateral Required Cash, Collateral, Pledge, Mortgage or
hypothecation of asset or as per PRs or bank's
requirement.

BANK ISLAMI PAKISTAN LIMITED

Murabaha
Underlying Islamic Mode Murabaha
Type of Product Corporate, SME
Basis for Pricing KIBOR
Minimum Financing Limit As approved by bank's credit committed
Maximum Financing Limit Rs.900 million (linked with bank's equity)
Minimum Tenors 15 days
Maximum Tenors 180 days
Target Customers Corporate, SME
Security/Collateral Required Cash margin, Equitable/registered mortgaged
pledge of stocks/shares, Hypothecation charge on
current assets

24
EMIRATES GLOBAL ISLAMIC BANK LIMTED

Murabaha Finance Local

Underlying Islamic Mode Murabaha
Type of Product Corporate, SME and Investment Banking
Basis for Pricing depend on the credit worthiness of the client
Minimum Financing Limit No
Maximum Financing Limit as per PRs
Minimum Tenors No
Maximum Tenors 3Year
Target Customers SME, Local Corporate
Security/Collateral Required pledge of commodity finance inclusive of margin,
Hypothecation, Mortgage, Personal Guarantee,
Cash Margin, Lien,

DUBAI ISLAMIC BANK LIMITED

Murabaha for Purchase Order (local)

Underlying Islamic Mode Murabaha
Type of Product Corporate, Commercial and SME
Basis for Pricing Cost plus mutually agreed profit
Minimum Financing Limit As per prudential regulations
Maximum Financing Limit As per prudential regulations
Minimum Tenors NA
Maximum Tenors 1 year
Target Customers Manufacturing industries, Construction Industries,
Traders and Individuals
Security/Collateral Required Hypothecation of assets, Charge on current & fixed
assets or any other security deem necessary by the
bank

References

• Mr. Zulfiqar Ali

(Branch Manager, Meezan Bank Ltd. i 10 Markaz Branch, Islamabad)

• Mr. M. Sajid Javed

(Assistant Vice President & Manager, Soneri Bank Ltd, I 10 Markaz Islamabad)
25
• Mr. Shoaib Hassan

(Credit Manager, Meezan Bank Ltd, Yarn Market Branch, Faisalabad)

• Mr. Ashfaq ur Rehman

(Customer Relationship Manager, Bank Islami, Blue area Branch, Islamabad)

• www.sbp.org.pk/ibd/2008/IFAS/Session-2-IFAS-1.ppt

• www.alhudacibe.com/.../Bai%20(Murabahah.../Murabaha%20by%20Muftti%20Najeeb
%20Khan.ppt

• www.sbp.org.pk/.../Murabaha%20Facility%20Agreement-1.htm

• www.sbp.org.pk/ibd/Bulletin/Bulletin.asp

• http://www.meezanbank.com/docs

• http://www.albaraka.com.pk/downloads-documents/FinancialStatments

• http://www.dibpak.com/Upload/142010124820DIBPLAccountsDecember2009
FinalCopy.pdf

• http://www.egibl.com/egibl/downloads/financail-statement

• www.bankalbilad.com

• http://www.meezanbank.com/murabaha.aspx

• http://www.albaraka.co.za/home.aspx

26