You are on page 1of 5


1. 2. 3. 4. 5. Murabaha facility agreement Purchase requisition order Purchase advise Information Memorandum/declaration Offer & acceptance for Murabaha

Purpose: Since conventional bank allow cash finance/running finance/demand finance as one year short term loan facilities, thus Islamic bank is also required to satisfy that financing limit is available to the customer Islamic Bank has to prove that the bank deals as financial intermediaries. Party Relationship: Shariah status bilateral promise to witness that Islamic bank promised with the customer to “finance” raw material, tradable goods to the customer. Bank’s Status: Promisor Customer’s Status: Promisee Risk Involved: In the absence of any financing agreement i.e. Murabaha facility agreement the SBP auditors will deem (Ikhtiar) the sale purchase of goods between Islamic bank & customer as trading has been carried out by Islamic bank as trader. a. b. The reason being a law sub section “ee” of section “7” of BCO 1962 is violated. Many terms & conditions need to linked out for example; i. Maximum amount of finance available to the customer to maximum extent of annual raw material/tradable goods. ii. Maximum tenure of each Murabaha contract needs to be agreed upon. Almost all Islamic banks do not allow Murabaha beyond 180 days tenure. The reason being Murabaha contract selling price consist of cost & profit. Once the selling price is fixed cannot be changed.

Status of Relationship: Agency Risk Involved: If purchase requisition or purchase order is not submitted by the agent “in time”. 3. This sub section prohibited the commercial bank to act as trading house this Islamic bank does not receive ant purchase /order from the customer as agent and goods are purchased then sub section ee of section 7 of BOC 1962 is violated by Islamic bank. 2. Status of Relationship: Agency Risk Involved: If purchase advice is not issued by Islamic bank in time /before purchase of goods. the agent by issuing just a purchase requisition . Risk Mitigation: In case of finance related business purchase order application received by Islamic bank. Party Relationship: Islamic Bank is the principal & client is agent. Purchase requisition order Purpose: To confirm that agent requires purposing some specific goods mention on purchase requisition. Purchase advice Purpose: To restrain the agent to purchase goods without principal authority. there is a risk that Islamic bank may be classified as “acting against law” Means Islamic bank is acting (Sub section I ee) of banking compliance order 1962. thus Islamic bank become able to know what goods are going to be purchased by agent. Party Relationship: Islamic Bank is the principal & client is agent.Risk Mitigation: Islamic bank should execute agency agreement first & simultaneously Murabaha facility agreement with sanction advice/ offer letter should be subject to the execution of both above said agreement.

. however by neglecting this Shariah principal any act for the sale purchase of such goods will render such type of sale as void. Status of Relationship: Agency Risk Involved: If information memorandum declaration is not issued “in time” immediately after the goods possessed by the agent. there should be a concrete product policy to monitor that. the goods may be consumed by the agent in its possession before the information memorandum / declaration is issued by the agent. However. Party Relationship: Islamic Bank is the principal & client is agent. 4.000/360 PKR 103. = Average stock or stock value at any particular point in time Average consumption of raw material per day For example: 45 days x = = x 842. Information Memorandum/declaration Purpose: To bind the agent to inform the principal immediately after the goods are possessed by the agent. Risk Mitigation: Compute average raw material consumption period in term of days for each respective client. thus once the goods have been consumed that do not exist accordingly consequently no sale purchase of such goods can be executed which do not exist./order may purchase some dangerous goods which risk is borne by Islamic bank. Risk Mitigation: Islamic bank should issue purchase advise before the goods are purchased by Islamic bank.808 This 45 days period will be become bench mark. under which we must take information memorandum/ declaration from the agent.

a. Railway/truck receipt b. Further. a. there should be 15 days from the date the LC is established by Islamic bank as opening/ issuing applicant bank & information memorandum declaration is issued by the agent. receiving of bill of lading is a first class document evidencity the ownership of Islamic bank. Relationship: Islamic Bank is the seller & client is buyer. Whereas in case of import goods. in case of locally manufactured goods there should not be lapse of 15 days from the date the pay order/ demand draft is issued by the Islamic bank and declaration is issued by agent. Any other document which proves that ownership has been taken by Islamic bank should be used to avoid “void” contract of Murabaha. The reason being the client feels comfort while consuming the goods in its possession that the issuance of information memorandum/declaration was the enough sufficient document to consume the goods. There are two kinds of possession. Physical b. normally Islamic bank wait for receiving of commercial invoice/sale tax invoice as an evidence of ownership to execute sale of Murabaha with the customer.a. 5. possessed by client as agent of Islamic bank. Risk Involved: If sale is not executed in time. being prepared at client premises. Constructive . b. Goods dispatch note issued by supplier c. In case of imported goods. Offer & acceptance for Murabaha Purpose: To execute sale purchase between the Islamic bank & client for the goods. Such documents in case of local manufactured goods are. Goods received note. then Islamic bank involve in a risk of executing Murabaha contract for the goods which don not exist.

whereas Constructive possession is called “Qubza-e-Ma’anvi”. hypothecation charge). pledge.Physical possession is “Qubza-e-Haqiqi”. • Possession over the goods must be with the owner of the goods physical or constructive (free charge having full information that there is no claim of ant third party over the goods like Mortgage. . through this kind of possession over goods is taken through a documents evidencing the transfer of ownership. Risk Mitigation: Immediately after receiving the information memorandum/declaration from the client Murabaha contract should be executed on the same day based on constructive possession. now on this stage following conditions of a valid sale are fulfilled. CANDITION OF VALID SALES: • Parties to the contract for making offer & acceptance. • Ownership of the subject matter with the seller. Price (saman) / Lawful Consideration.