Concept of Murabaha &

AAOIFI Standard
BASIC RULES OF SALE
 Rules of Sale

• Since Murabaha is a sale transaction, rules of Shariah

regarding sale should be understood.

• Sale is defined in Shariah as

“Exchange of a thing of value, by another thing of value,

with mutual consent”
 Basic Rules of Sale

Rule 1
The subject of sale must exist at the time of sale

Rule 2
The subject of sale must be in the ownership of seller at the time
of sale. Hence, what is not owned by the seller cannot be sold.
Rule 3
The subject of sale must be in the physical or constructive
ownership of seller at the time of sale.
 Basic Rules of Sale

Rule 4
The subject of sale should not be a thing used for a Haram
purpose, e.g. pork, wine etc. The subject should be Maal-e-
mutaqawwam
Rule 5
The subject of sale should be an object of value. A thing having
no value according to the usage of trade cannot be sold.
Rule 6
The subject of sale should be specifically known and identified to
the buyer. The subject of sale must be identified by pointing out or
by detailed specification which can distinguish it from other things
not sold.
Concept of Murabaha
 Murabaha

• Murabaha is a particular kind of sale and not a financing in its

origin.

• Where the transaction is done on a “cost plus profit” basis i.e. the
seller discloses the cost to the buyer and adds a certain profit to
it to arrive at the final selling price.

• The distinguishing feature of Murabaha from ordinary sale is:

- The seller discloses the cost to the buyer.

- And a known profit is added.
 Murabaha

• Payment of Murabaha price may be:

1) At spot
2) In installments
3) In lump sum after a certain time

• Hence, Murabaha does not necessarily imply the concept of

deferred payment.
 Banking Murabaha

• It is a contract wherein the institution, upon request by the

customer, purchases an asset from the third party(a supplier) and
resells the same to the customer either against immediate
payment or on a deferred payment basis.

• 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
Basic rules for Murabaha financing:

• Asset to be sold must exist.

• Sale price should be determined.
• Sale must be unconditional.
Assets to be sold:
a) Should not be used for un-Islamic purpose.
b) Should be in ownership of the seller at the time of sale;
physical or constructive.
Step by step Murabaha financing
 Steps in Murabaha Financing

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

(MMFA).

Bank Agreement to Client

Murabaha
 Steps in Murabaha Financing

2. Client appointed as agent to purchase goods on bank’s

behalf

Bank Agreement to Client

Murabaha
 Steps in Murabaha Financing

3. Upon submission of Order form Bank gives money to

agent/supplier for purchase of goods.

Bank Agreement to Client

Murabaha
Agency
Agreement
Disbursement to the agent or supplier

Supplier
 Steps in Murabaha Financing

4. The agent takes possession of goods on bank’s behalf

and informs bank through a Declaration form.

Delivery
Transfer of Risk Vendor of goods

Bank Agent
 Steps in Murabaha Financing

5(a). Client makes an offer to purchase the goods from

bank through a Murabaha Contract.

Bank Client

Offer to
purchase
 Steps in Murabaha Financing

5(b). Bank accepts the offer and sale is concluded.

Murabaha Contract
+
Transfer of Title

Bank Client
 Steps in Murabaha Financing

6. Client pays agreed price to bank according to an agreed

schedule. Usually on a deferred payment basis (Bai
Muajjal)

Bank Client
Payment of Price
Murabaha to the Purchase Orderer
(AAOIFI Shari’a Standard # 8)
 Stages of Murabaha

1. Promise Stage - Procedures prior to the contract of

Murabaha.

2. Acquisition Stage – Acquisition of title & possession of the

asset by the institution or its agent.

3. Execution Stage – Conclusion of Murabaha Contract.

4. After Execution Stage – Guarantee & treatment of Murabaha

Receivables.
Promise Stage
 Promise Stage

• It is permissible for the institution to purchase the item only in

response to its customer’s wish and application and/or from a
particular source of supply.

• The customer may sign a ‘Promise to Buy’ the item from the
institution based on his wish and application.

• The customer may obtain statement of prices from the supplier

(offer of sale) addressed to the customer by name. It is
preferable that the invoice should be addressed to the
institution.
 Promise Stage

• Murabaha Transaction should exclude any prior contractual

relationship between the customer and original supplier.

• It is not permissible to transfer a contract that has been

executed between the customer and supplier.

• It must be ensured that the party from whom the item is

bought is a third party, and not the customer or his agent, so
as to avoid Bai-‘Inah (Buy Back).
 Promise Stage

• It is not permitted to carry out a Murabaha on deferred payment

terms where the asset involved is gold, silver or currencies.
• It is impermissible to issue negotiable instruments where the
underlying asset consists of Murabaha receivables or other
receivables.
• It is not permissible for the bank and the customer to form
Musharakah in a project with the promise from any of them to
buy other’s share in Musharakah on Murabaha bases.
• It is not permitted to conclude a Murabaha contract on a
commodity that was the subject matter of a previous Murabaha
with the same customer, i.e. Refinance the transaction.
 Promise Stage
• ‘Promise to Buy’ (signed by the customer) should not
be a bilateral promise binding on both parties.

• The institution can purchase the item from a supplier

on a ‘sale or return’ basis. This option expires by
virtue of actual sale by the institution to the customer.

• It is impermissible to receive from the customer a

commitment fee or a fee for providing a credit
facility.The expenses of preparing the documents of
the contract may be borne by one of the parties. If the
bank is arranger in Murabaha, it can charge a fee from
the participating institutes.
 Promise Stage
GUARANTEES

• If the client nominates the supplier, guarantee for good

performance of supplier can be demanded from the customer in
his personal capacity and not in his capacity as purchase
orderer or agent of the institution.

• It is permissible for the institution to take a sum of money (only

in case of binding promise from the customer) as ‘Hamish
Jiddiyah’ (i.e. security deposit) from the customer as an
indication of customer’s financial capacity or to ensure
compensation of any damage arising from a breach of promise.
 Promise Stage

• Security deposit can either be held as trust in the custody of

institution or it may be held as an investment trust on the basis
of Mudaraba.

• In case of breach of promise Hamish Jiddiyyah can be used to

recover actual damage however, it cannot be used for covering
the Opportunity Cost.

• The institution is allowed to take ‘Urbon’ (earnest money) after

concluding the Murabaha sale with the customer. It is preferable
to return to the customer that remains from Urbon after
deducting the actual damage incurred as a result of breach.
Acquisition Stage
 Acquisition Stage

• It is prohibited for the institution to sell any item in a Murabaha

transaction before having acquired the item.

• The contract between the institution and the supplier can be

completed through exchanging the notices of offer &
acceptance, either in written form or correspondence by any
form of modern communication.
 Acquisition Stage
Appointment of Agent

• It is preferable that the institution itself purchases the item

directly from the supplier. However, it is permissible to authorize
an agent (either the purchase orderer or some 3rd party) to
carry out the purchases. In case the customer is working as the
agent of the institution, he would not sell the item to himself by
himself.

• When the customer is appointed as agent to carry out the

purchases, the institution itself must pay directly to the supplier
and obtain from the supplier the documents that confirm the
execution of sale.
 Acquisition Stage
• It is obligatory to separate two liabilities of risk attaching to the
purchased item, namely the liability of the institution and the
liability of the customer as agent of the institution.

Possession of the Asset

• The institution’s actual or constructive possession must be

ascertained before its onward sale to the customer.

• The item must move from the responsibility of the supplier to the
responsibility of the institution .
 Acquisition Stage
Possession of the Asset

• It is obligatory that the point when the risk of the item is passed
on by the institution to the customer, be clearly identified.

• The forms of taking delivery or possession of items differ

according to their nature and trade customs.

• The receipt of a bill of lading by the institution or its agent,

when purchasing goods on the international market, is
considered as constructive possession.
 Acquisition Stage

• Taking insurance cover for the item bought to be sold by

Murabaha is the responsibility of the institution at the stage of
its acquiring ownership. The institution may subsequently build
such expense into the price of Murabaha deal.
Execution Stage
 Execution Stage
• The contract of Murabaha is not automatically concluded by
merely taking possession of the asset by the institution.

• The institution is entitled to receive compensation for any actual

damage it has incurred as a result of the customer’s breach of
a binding promise.

• The institution has the obligation to disclose to the customer the

credit given by the supplier and what is added in the cost. The
institution can add any expense related to the item if the
customer agrees or add only the direct expenses which are
normally included in the cost if the detailed break- up of the
cost is not given.
 Execution Stage
• It is not permissible to add indirect costs, such as staff salary
and the like, to the cost of the item.

• If the institution receives any discount from the supplier, the

customer should benefit from that discount by a reduction of
the total Murabaha selling Price.

• The price of the item and the institution’s profit on the

Murabaha transaction be fixed and known to both the parties
on the signature of the contract of sale.
 Execution Stage
• There is no objection to referring to any known benchmark
(such as LIBOR) as a comfort indicator to determine the rate of
profit.

• The selling price of the asset becomes a debt and it is not

permitted subsequently to demand any extra payment either in
consideration of extra time given for payment or delay in
payment.

• It is permissible for the institution to stipulate in the contract a

condition that the institution is free from responsibility for all or
some of the defects of the asset (Bai’-al-Bara’ah).
 Execution Stage

• It can be included in the contract that if the customer fails to

pay on time the institution will have the right to revoke the
agreement and repossess the item soled or the institution can
be given power from the customer to sell the item on behalf of
the customer and settle the debt by the price received and if
something remains would be recovered from the customer.
After Execution Stage
 After Execution Stage

• The installments may become due before their originally

agreed due dates in case of the customer’s refusal to perform
or delay in paying any installment without any good reason.
 After Execution Stage
Securities

• It is permissible to demand from the customer:

9 Third party guarantee or
9 Pledge of the investment account or
9 Pledge of any item of real or moveable property or
9 Pledge of the subject matter of Murabaha

• It is permissible to require the customer to provide cheques or

promissory notes before execution of Murabaha as a
guarantee of future indebtedness.
 After Execution Stage

• It is not permissible to stipulate that the ownership of the item

will not be transferred to the customer until the full payment of
the selling.

• It is permissible to postpone the registration of the asset in the

customer’s name as a guarantee of the full payment of the
selling price.
 After Execution Stage
Charity Amount

• It is permissible to have an undertaking from the customer, as

part of Murabaha contract, to pay an amount of money or a
percentage of the debt to be donated to charitable causes in
the event of delay in payment/installments.

Early Payment Rebate

• The institution may give up part of the selling price if the

customer pays early, provided this was not part of the
contractual agreement.
 After Execution Stage

• The payment of the debt due on account of Murabaha may

be made in currency different from that in which the debt is
denominated, provided exchange rate prevailing on the day of
settlement is taken.
Thank You