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During this introductory module we will be covering some basic modules of Murabaha, the step by step execution process

and some of its applications. Murabaha is defined as a sale transaction where cost and profit are expressly disclosed to the buyer by the seller at the time of sale. For example, if a baker sells a loaf of bread for Rs. 25 and discloses its cost as being Rs. 20 then such sale is classified as a Murabaha sale. But if the cost is not disclosed then it will be a normal sale of Musawama. Hence Murabaha is a particular kind of sale and not a type of financing in its origin. However, it is commonly used as an alternative to running finance or the conventional short-term finance with certain limitations by modern Islamic banks which we will be discussing later on in this module. Murabaha is also classified as a trust-sale. Since the buyer trusts seller he will disclose the correct cost to him. Thus, the only difference between Murabaha and the normal sale is the disclosure of cost and profit to the buyer. Since the Murabaha is a sale in its essence the payment of Murabaha price can be spot, in installments, or in deferred lump sum amount, just as it can be in any other type of sale. Hence, Murabaha sale doesnt necessarily imply deferred payment sale as is commonly misunderstood. Since Murabaha is a sale transaction although rules of sale as outlined by Shariah must be followed to make a Murabaha sale valid under Shariah. At this stage we will briefly discuss the certain rules regarding sale. Rule # 1: The asset to be sold must exist. Hence we cannot sell an unborn calf of a cow because it doesnt exist at that time and its existence after a certain period of time is also not certain. Rule # 2: The goods to be sold must be in the ownership of the seller. Even though the goods exist but if they are not in the ownership of the seller then the sale cannot be executed. Rule # 3: Apart from the ownership and the existence of the goods the goods must also be in the physical and constructive possession of the seller. By possession it is meant that the full control the risk and the reward is bound by the seller. A constructive possession is a form of possession where goods are not physically with the seller. However he has full risk, reward and control of the goods. An example of constructive possession is a possession through documents of imported goods, or the possession by the principal through his agent. Rule # 4: It is necessary that the price of the goods in a sale transaction must be fixed at the time of sale. Different options maybe quoted by the seller at the time of sale, but the sale must be concluded at the single price and after the execution of sale all other options become null and void. Rule # 5: Another rule regarding sale is that a sale must be unconditional and must be absolute and instant. By absolute and instant it is meant that the ownership of the subject matter is immediately transferred to the buyer upon the execution of sale.

Rule # 6: The goods to be sold must not be Haram or to be used for an un-Islamic purpose; for example, wine or pork. Step by Step Murabaha Financing: Before understanding the procedure for Murabaha financing let us first discuss the shortterm financing mode used by a conventional bank. In case of conventional banks when a customer when a customer requires some funds he will just walk in to the bank, get the limit approved and the bank disburses him the required amount. The customer will use this loaned amount and return it to the bank on the scheduled maturity date along with the interest amount. That is how conventional banks make money. The same requirement will be fulfilled by an Islamic bank by using Murabaha in the following manner. Upon request of financing an Islamic bank will ask the customer for which the funds are required. If the funds are required for the purchase of certain goods like rice or clothe then the Islamic bank will fulfill the requirement by purchasing these goods from the market on cash basis and selling it to the customer on credit basis by adding a known profit amount. Now lets discuss the various steps required for executing Murabaha transaction in a Shariah compliant manner. Step # 1: After analyzing the credit worthiness of the client the bank and the customer sign a Memorandum of Understanding known as the Master Murabaha Facility Agreement (MMFA). The MMFA is not a sale agreement but it is a document of understanding between the bank and the customer, and lays down certain transaction parameters for the sub-Murabaha sale transaction to be executed from time to time during the following year between the bank and the customer so that no disputes arise at the time of sale. One of the main parameters outlined by the MMFA is that it specifies the maximum limit up to which the facility maybe availed by the customer during the following year. After the execution of MMFA the customer and the bank sign an Agency Agreement under which the customer is appointed as an agent of the bank to purchase goods on banks behalf from time to time. Although, making the customer as an agent is not mandatory as per Shariah but to avoid any disputes and banks lack of expertise regarding the product selection it is beneficial both for the bank and the customer that the customer is appointed as banks agent to purchase goods for the bank. After signing of MMFA and the agency agreement upon the requirement of purchase of assets during the normal course of the business the customer will submit the order form to the bank for such purchases. Upon receiving the order form the bank shall authorize the customer to purchase the required goods as banks agent. After authorization the agent shall negotiate the deal with the supplier and the bank shall pay the money to the supplier in the form of pay-order or any other payment mode. Here it is important to know that such payment is not made to the customer but it is made to the supplier; hence, directly generating economic activity in the society. After receiving the payment, the goods are released by the supplier to the agent. It is very critical to note that upon delivery of goods to the agent the risk and reward of the goods transferred from the supplier to the bank. At this time if the goods are destroyed without the agents negligence or due to any natural calamity

then all the risk and the loss will be borne by the bank. As soon as the goods are received by the banks agent, the agent in the capacity of the customer shall make an offer to purchase the goods from the bank at a price and for a payment schedule as per the terms and conditions of the MMFA. The customer shall also provide copies of purchase evidences in the form of invoice and bills of entry. Upon receiving the offer the bank shall ensure that the goods are in the possession of the customer. Upon affirmative confirmation the bank shall accept the offer and the sale shall be concluded. Upon such sale, the ownership of the good shall transfer from the bank to the customer. The agreed Murabaha selling price shall be paid by the customer to the bank on the agreed dates as per the payment plans agreed at the time of sale. Application of Murabaha: Murabaha can be used for various short term working capital or long term financing requirements of the customers.; for instance, the purchase of raw materials of for the purchase of land or equipment. However, it must be noted that it can only be used for asset based requirement of the customer. Murabaha cannot be used where no tangible assets are involved; for instance, for the payment of wages or electricity bills.