Murabaha Practice in Bangladesh

(Based on Anecdote of an Industry Practitioner)

Abdullah Al Masud
PhD Student
Istanbul Sabahattin Zaim University
 Murabaha Financing Traits in
Bangladesh
• In Murabaha, customer request bank for financing (credit
period) to procure some goods either to use those goods
for his production process or to consume the goods.
• Knowing the requirements of the customer bank sells those
goods with profit. Mathematically it corresponds to pricing
for the credit period. Here different bank takes different
strategy. Most Bangladeshi banks calculate the profit for
one year credit period. Thus for early payment, banks can
give rebate.
• Murabaha is primarily used for short term financing (for 1
year and less credit period).
• The goods under murabaha can be used as security incase
of default. Bank like to take liquid asset and land/property
as security. Personal & corporate guarantees are also taken
as security.
 How Default is Managed
• After default comes collection and recovery process.
Sometimes verbal chasing sometimes external agencies
which may include different degrees of threat (for retail
cases).
• Additional time is given upon mutual agreement (how,
when and how much to pay by customers).
• For corporate mostly mutual agreement by restructuring or
rescheduling. Rare case by litigation and selling of secured
proerty (i.e., exercising those securities).
• As time goes to do all these recovery activities, customer is
charged "late payment" which may or may not be waived.
• Even sell mortgaged properties where applicable
 Murabaha as % of Total Investments
(For Islami Bank Bangladesh Ltd)
• Islami Bank Bangladesh Ltd is the largest Islami
bank by asset size in Bangladesh
• In 2021, its Total Investments was BDT 1,137bn
• Bai Murabahah contract constituted about BDT
754 bn
• % of Murabaha : 66%
• HPSM is the 2nd largest mode of investment for
the bank with about 20%
 Benchmark Rate in Murabaha
• There is a interest rate cap on Lending/Investment by
Central Bank of Bangladesh of 9%. So that is the maximum
rate that can be charged by islami banks
• For pre-shipment finance, the cap is 7%
• Some bad banks may not use benchmark rate but good
banks do use it to calculate profitability of a business.
• Different banks may have different methodology to
determine this benchmark. Some use Fund Transfer Pricing
(FTP) method, some use moving average of Treasury bill
rate, some may use "interbank offered rate" some may use
Secured Overnight Financing Rate (SOFR), LIBOR for foreign
currency denominated financing etc.
 Retail vs Corporate in Murabaha
• For retail: mostly all personal finance is
provided under Murabaha, whereas auto &
home finance under HPSM.
• For corporate: mostly short term finance are
under Murabaha, term finance under HPSM.