Mrabaha

 Islam prohibits charging fixed interest on money, but permits

charging fixed profit on sale of goods.

 In order to ascertain their profit Islamic banks therefore use a

sale-based transaction (Murabaha) instead of a term loan for
financing purchase of assets by their clients, especially for
working capital requirements.

 Over 70% of all business volume of Islamic banks comprises of

Murabaha transactions
 Murabaha is a particular kind of sale.

 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

(Musawamah) is
- The seller discloses the cost to the buyer
- And a known profit is added
 Banking Murabaha is a contract wherein Islamic Bank,
upon request by the customer, purchases an asset from a
third party (supplier/ vendor) and resells the same to the
customer usually against a deferred payment (Bai Mujjal).

 It is called Murabaha to the Purchase Orderer.

 It is a bunch of contracts completed in steps and ultimately

suffices the financial needs of the customer.
 As Banking Murabaha is a kind of sale, there must be
a seller and buyer and something needs to be bought
and sold.

 In such transactions the Bank is the seller, the

customer is buyer and a commodity/goods are
exchanged between them.
 As per the rule of Shariah the seller cannot sell the goods
unless they come into his ownership.

 Bank is, therefore, required to purchase the required

commodity from the market.

 However, since the Bank may not deal in the commodity

markets, the Bank may appoint the customer its agent to
procure the goods on its behalf.
 Once the customer purchases the goods as agent of the
Bank, the risk of the goods transfers to the Bank.

 Bank can now sell these goods to the customer.

 Please note that the customer play two different roles in

this transaction. One that of Bank’s agent and other of
purchaser. These roles should be clearly segregated to
make the transaction halal.
 Step

1. Client and Bank sign an agreement to enter into

Murabaha.

Bank Client
Agreement to
Murabaha
2. Client appointed as agent to purchase goods on
Bank’s behalf

Bank Client
Agreement to
Murabaha
Agency

Agreement
3. Bank gives money to supplier/ client for purchase
of goods.

Bank Client
Agreement to
Murabaha
Agency

Agreement

Disbursement to the supplier or agent

Supplier
4. Client purchases goods on Bank’s behalf and
takes their possession.

Transfer of Delivery
Risk Vendor of goods

Bank Agent
5.Client makes an offer to purchase the goods from Bank at a
particular price.

Bank Client

Offer to
purchase
6. Bank accepts the offer and sale is concluded.

Bank Client

Murabaha Agreement
7. Client pays agreed price to bank according to an
agreed schedule. Usually on a deferred payment basis
(Bai Muajjal)

Bank Client
Payment of Price
Application
Murabaha can be used to finance the purchase of any assets which
is recognized as Mal-e-Mutaqawam (Valuable) under Shariah and
posses a tangible form. For example Murabaha can be used to
finance the purchase of:

Raw Material
Equipment
Consumer Goods
Murabaha Documentation

• Following Agreements/Documents are involved in a

Murabaha financing transaction.
• Master Murabaha Finance Agreement (MMFA)
• Agency Agreement (Appendix ‘A’)
• Purchase Requisition/Written Request
(Appendix ‘C’)
• Offer & Acceptance Form (Appendix ‘D’)
• Payment Schedule
 Issues in Murabaha

1. Timing of Offer & Acceptance

2. Rollover in Murabaha
For every asset new murabaha contract is signed, previous
agreement cannot be used again for the same goods as well.

3. Penalty on late payments

Any payment over & above Dayn is riba so we cannot charge
late payments however we can ask the customer to pay
forced charity if he delays in any payment.
 Issues in Murabaha

4. Rebate on early payments

In case of early payment by the customer, there is no commitment by the
institution in respect of any discount so bank has the sole discretion.

5. Subject matter of Murabaha

Murabaha cannot be use in trading of currencies. Sale subject must be; in
existence, have intrinsic value, usable for halal purpose, capable of
ownership, specified & quantified and must be in the ownership of bank at
the time of sale.
 Issues in Murabaha
6. Physical Verification Purchase Evidence
RM must physically verify the goods purchase by customer. Asset
Purchase evidence must be there in the form of invoice inorder to
confirm that purchase took place after agency agreement.

7. Direct Payment in Murabaha

Bank can pay directly to the supplier via cheque, payorder but if there is
any issue then bank credit murabaha funds in customer account & allow
him to issue payorder demand draft in favour of supplier.
 Issues in Murabaha

8. Default in Promise by the Customer in a Murabaha

• If the Customer refuses to purchase goods after the Bank has purchased
then:
• Bank can file a legal suit and make the customer fulfil its promise
• Bank can sell the goods in the market and recover its investment.
• If the commodity is sold at a price which is higher or equal to
the Bank's investment, the Bank can keep all of the proceeds
and cannot claim any other benefit from the customer.
• If the Bank fails to recover its investment it can claim
difference from the customer.