MURABAHAH PRODUCT

STRUCTURE
Price (s) (deferred payment) Title
Customer Application FA

Bank

AA Customer as agent Goods

Title

Price (c) Paid

Supplier

MURABAHAH PRODUCT STRUCTURE

steps and relationships

1. Client & Bank sign facility agreement - Promise to buy / sell commodities on an agreed profit ratio. Promisor / Promisee. 2. When customer requires a commodity he is appointed as agent for purchasing the commodity => agency agreement Principal / Agent

3. Client purchases from a Third party, takes possession as agent of the

Bank. Supplier / Buyer. Bank becomes owner of the goods 4. Client Informs the Bank and makes an offer to purchase from it.

Buyer ( client) / Seller (bank).

5. Offer accepted and sales concluded. Ownership as well as risk transferred from the bank to the client. Debtor / Creditor.

MURABAHAH a sale transaction in which the bank takes the role of seller and business firm takes the role of buyer. The actual cost directly incurred in acquiring the commodity is disclosed and the profit negotiated. By defering the sale price it becomes a financing product. Rules of a sale to be followed e.g. Offer and acceptance Instant and absolute : not for a future date The price must be certain

MURABAHAH

Underlying theme is :
The bank on the request of customer (who needs to buy commodities for his business) will buy commodities and after adding its profit will sale to him on deferred payment basis. The price will be paid by the customer to bank according to a mutually agreed schedule. Bank will be entitled to evaluate and mitigate its credit risk as well as other risks in a suitable manner

MURABAHAH PRODUCT STRUCTURE

some important issues

Exact cost ascertainable. Actual purchase of commodities. No buy-back. The financier must:

own, take possession, assume risk of ownership.

Preferably he should purchase himself.

Customer can act as agent.

Violation of the recommended procedure may turn it into an Interest based loan.

MURABAHAH PRODUCT STRUCTURE some important issues Price once fixed cannot be changed due to earlier or

late payment.
Default:Penalty to go to charity.

Default:Facility may be recalled.

Default: Invoke Security / P Note / Bill of Exchange. Role Over / Rescheduling possible only if add ional cost is not charged Securitization is not possible because the underlying asset is a receivable ----not a physical asset

USES OF MURABAHA

L/C Purchase and resale of goods, plants m/cs etc

Short term and long term

Various forms used by Islamic banks

DEFINITION OF IJARAH

Ijarah is an agreement whereby the lessor conveys

to the lessee in return for rent, the right to use an asset for an agreed period of time. A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset.

BASIC RULES OF IJARAH Owner transfers usufruct for an agreed period and consideration. Retains ownership

Period n Purpose of use to be clearly defined.

Loss to be borne by bank except due to misuse . All liabilities emerging from the ownership to be borne by the lessor. Liabilities referable to the use of the property to be borne by Lessee. e.g:* Property tax ------ lessor.

* water tax, Electricity ------ lessee.

BASIC RULES OF IJARAH Rent must be determined at the time of contract for the

whole period. Bank cannot increase rent unilaterally.

Lease to commence after delivery. Advance rent before delivery on account. To be adjusted towards rent. Lease to terminate if leased asset loses it value. No rent in case of termination. Calculation of IRR.

DIFFERENCE B/W IJARAH &

FINANACE LEASE. Commencement of Lease. Different relations of the parties. Expenses consequent to ownership. Liability of parties in case of loss to the asset. Variable rentals in long term lease.

ffcontinuedhh

Penalty for late payment of rent

Termination of lease Insurance the residual values of the leased asset sub-Lease Assigning of the lease. Securitization of Ijarah.

SECURITIZATION OF IJARAH
The leased asset is purchased by the financier. He can do it either on his own or have other partners who will share the rent income The partners can be few institutions or large no of small investors from the general public Certificates of proportionate ownership in the assets to be leased out can be issued which can be traded over the counter or listed on the stock exchange

INSTITUTE OF BUSINESS FINANCE & INDUSTRY

MUSHARIKA

Musharika or Shirkat-ul-amwal is a relationship established by the parties through a mutual contract,whereby the parties agree to invest in a commercial enterprise Investment in cash or kind subject to valuation Sharing the assets in the ratio of financing

INSTITUTE OF BUSINESS FINANCE & INDUSTRY

PROFIT /LOSS DISTRIBUTION

1. Proportion agreed in the beginning to make it a valid contract. Ratio of investment or different. 2. Ratio of actual profits, not the face value of the instrument. 3. On account payment possible, subject to adjustment in the final accounts. 4. Sleeping partner should not get more than the ratio of his investment 5. Loss in proportion to the investment

INSTITUTE OF BUSINESS FINANCE & INDUSTRY

M ANAGEMENT
1. 2. 3. 4.
4.

Every partner or some by agreement can manage. The bank takes the role of sleeping partner. at maturity musharaka will come to an end. can be terminated by notice
To ensure continuity n prevent mischief conditions may be agreed in the beginning to facilitate exit of the partners without forcing a liquidation or separation Price of the share of the leaving partner to be determined by mutual consent.

5.

A P PL I C A T I O N S
Project Financing Import / Export Financing Working Capital Financing

PROJECT FINANCING
Modarabah or Musharakah or combination
Valuation of Capital Distribution of Profits Withdrawal of the Financier Investment Units

Securitization COMs
Liquid / illiquid asses

IMPORT / EXPORT FINANCING

Mudarabah or Musharakah or Combination depending on LC margin. Ownership of goods and therefore proceeds in the ratio of investment Importer can also purchase financiers share on MP or negotiated price if goods not sold until a preagreed date. Pre-agreed price not possible . Loss to be shared except due to negligence or misconduct of the client.

WORKING CAPITAL
Owners contribution in the form existing capital to be determined through evaluation with mutual consent Financers Contribution in the form of cash Period may be 12 month, 6 months or less.

ASSET FINANCING
The contract of Shirkat ul Milk or joint ownership is used

Joint ownership of unit say 80/20. The client pays rent for using the share of the Other party. (In other words a rent is determined to be paid by client for using the house and is shared in proportion to the ratio of investment. Financiers share is paid by the client ). Financier makes investment in units which are progressively bought by the client.

MAIN FEATURES OF THE MODEL

Joint ownership in the property (shirkat-al-milk) is created.
The share of the financier is given on rent to the client.

Promise from the client to purchase the units of share of the financier.
Actual purchase of the units at different stages. Adjustment of the rental according to the remaining share of the financier.

INSTITUTE OF BUSINESS FINANCE & INDUSTRY

Equity Investment
1. Main Business not violative of shariah 2. Disapproval for surplus money being kept in interest bearing accounts. 3. Proportionate income from the dividends be given in charity. 4. Negotiability subject to some illiquid assets. Extent of illiquid assets 51%- 33% Price should be more that the value of liquid amount Debt to Asset ratio 35%

INSTITUTE OF BUSINESS FINANCE & INDUSTRY

M O DARABA
Special Kind of Partnership where: One Partner (Investor or rabb-ul-mal) gives money to another (Manager or Mudarib) for investing it in a Commercial Enterprise Investor and Manager Restricted or unrestricted business Mudarib authorized to do any thing normally done in that business. Permission of Investor(s) required for Extra ordinary things

INSTITUTE OF BUSINESS FINANCE & INDUSTRY

BUSINESS PROFITS

Distribution on a definite proportion of actual

profits to be agreed in the beginning

No lump sum No percentage of capital invested

No salary for the Mudarib

INSTITUTE OF BUSINESS FINANCE & INDUSTRY

TERMINATION

Contract Terminable by either party after notice. Assets may be disposed off at termination. Minimum time limit, may be specified in the beginning to ensure continuity All the conditions agreed upon by the Muslims are upheld, excepts a condition which allows what is prohibited or prohibits what is allowed