MURABAHA

Murabaha is a particular kind of sale where the seller

discloses its cost and profit charged thereon.

 The price in this sale can be both on spot and deferred.

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SOME BASIC RULES FOR SALE
IN SHARIAH
 The subject matter of sale must exist at the time of
the sale. Thus anything that may not exist at the time of
sale cannot be sold and its non-existence makes the
contract void. (UNBORN CALF EXAMPLE)

 2. The subject matter should be in the ownership, either

actual or constructive, of the seller at the time of sale.
( CAR EXAMPLE)

 The subject of sale must be in physical or constructive

possession of the seller when he sells it to another
person.( car example)
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BAI MUAJJAL
SALES ON DEFERRED PAYMENT BASIS
 The term ‘Bai-Muajjal’ has been derived from Arabic words (Bai’un and
Ajalun). The word  BAIUN means purchase and sale and the word 
AJALUN  means a fixed time or a fixed period. " Bai-Muajjal "  means sale
for which payment is made at a future fixed date or within a fixed
period. In short, it is a sale on Credit
 Bai-Muajjal may be defined as a contract between a Buyer and a Seller
under which the Seller sells certain specific goods permissible under
Islamic Shari‘ah and Law of the land) to the Buyer at an agreed fixed
price payable at a fixed future date in lump sum  or  within a fixed
period by fixed instalments. The seller may also sell the goods purchased
by him as per order and specification of the Buyer.

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SPECIFIC CONDITIONS BAIMUAJJAL

 DEFERRED PAYMENT
 IF DUE DATE IS FIXED IN UMIMBIGUOUS MANNER
 DUE DATE CANNOT BE MADE FIXED WITH REFERENCE TO AN UNCERTAIN EVENT
 PAYMENT DATE WILL BE STARTED FROM THE DATE OF DELIVERY OR UNLESS THE
PARTY AGREED OTHERWISE
 DEFERRED PRICE MAY BE MORE THAN THE CASH PRICE BUT IT SHOULD BE FIXED AT
TIME OF SALE
 FIXED PRICE CANNOT BE DECREASED IN CASE OF EARLY PAYMENT NOR INCREASED IN
CASE OF DEFAULT
 IN CASE OF DEFAULT BUYER MAY PAY SOME SPECIFIC AMOUNT TO SELLER WHICH
WILL BE DONATED TO CHARITY

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SPECIFIC CONDITIONS
BAIMUAJJAL
 IN CASE OF INSTALLMENT PAYMENT SELLER MAY ASK
BUYER TO IMMEDIATELY PAY REMAINING INSTALMENTS IN
CASE OF DEFAULT
 SECURITY MAY BE ASKED FROM BUYER
 PROMISSORY NOTE MAY BE SIGNED FOR THE REQUIRED
AMOUNT BUT THIS NOTE OR BILL OF EXCHANGE CANNOT
BE SOLD TO THIRD PARTY ON A DIFFERENT PRICE

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 BANKING MURABAHA

The product of Murabaha that is being used in Islamic banking as a mode of

finance is something different from the Murabaha used in normal trade .

 This transaction is concluded with a prior promise to buy, submitted by a

person interested in acquiring goods through the institution.

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BANKING MURABAHA

 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 client.

 The sequence of their execution is extremely

important to make the transaction Shariah
compliant.

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 BANKING MURABAHA
It is a contract wherein the institution,
upon request by the customer,
purchases a asset from the third party
usually a supplier/vendor and resells the
same to the customer either against
immediate payment or on a deferred
payment basis.

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9
MURABAHA FLOW CHART

Murabaha Flow Chart

Transfer of title (6)

Offer and acceptance to Purchase (5)

Repayment (7)
Bank Client
MF Agreement (1)

Agency Agreement (2) Goods

Payment (3)

Risk Transfer (4)

Vendor 10
SCOPE OF MURABAHA
As it is a kind of sale, there must be a seller and buyer and some
thing that is bought and sold . The institution is the seller and the
client is buyer.
Itcannot be used as a substitute for running finance facility , which
provides cash for fulfilling various needs of the client.
The basic ingredient of murabaha is that the seller discloses the
actual cost he has incurred in acquiring the commodity and then add
some profits thereon.
The profit maybe in a lump sum or may be in percentage .

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SCOPE OF MURABAHA
Itis a fixed price sale and normally is
done for short term.

The transaction can be used in order to

meet the working capital requirements
however it cannot be used to meet
liquidity requirements.

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MUSAWAMAH

 Musawamah is a term used in Islamic finance. It describes a

type of transaction in which the buyer does not know the price
paid by the seller to create or obtain the good or service being
offered.
 Musawamah describes a transaction where the price of the
good or service is not disclosed to the buyer. This differs from 
murabaha transactions, where a buyer knows the cost of the
underlying asset. Since the seller is not obligated to disclose
the cost of obtaining or producing the merchandise for sale to
the buyer, the agreed selling price is left to the bargaining
powers of both the seller and buyer.

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MUSAWAMAH EXAMPLE

 Michaela wishes to purchase a souvenir from a merchant during her

travels in Morocco. She settles on a locally made scarf which is being
sold by an artisan in a small market.
 Because the scarf has clear usefulness and value to the buyer, and
because it is currently in the possession of the seller and is being sold at
the present time, the sale of the scarf qualifies as a Musawamah
transaction under Sharia law. For this reason, the merchant is not
obligated to disclose to Michaela the underlying cost of producing the
scarf. Therefore, Michaela will not know the seller’s profit margin when
negotiating over the price.
 For these reasons, Michaela and the merchant are free to barter over
the price of the scarf until they reach a mutually acceptable agreement.

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STAGES OF MURABAHA
1. Promise Stage

2. Agency Stage

3. Acquiring Possession

4. Execution of Murabaha

5. After Execution of Murabaha

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STAGES OF MURABAHA

PRIOMISE STAGE

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 CREDIT APPROVAL (under
Shariah perspective)
Points to Be Considered While
Approving Credit

It is essential that the transaction between two

parties must be genuine , not fictitious and
should exclude any prior contractual
relationship between the customer and original
supplier .

It is not permissible to transfer a contract that

has been executed before between client and
supplier. However revocation of prior contract
between the supplier and the client can allow
the institution to enter in Murabaha
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 CREDIT APPROVAL (under
Shariah perspective)
Points to Be Considered While Approving Credit

The Institution must insure that the

party from whom the item is bought
is a third party and not the customer
or his agent . In this manner the
transaction can be saved from Bai
Inah (Buy Back) which is not
allowed in sharia.

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 CREDIT APPROVAL (under
Shariah perspective)

 Nature of the Business to be in scope of

the Murabaha . Nature of business
should be Halal in order to finance it
through Murabaha.
 Differed payment not permissible in
case of Gold, Silver and Currencies.
 Cyclical nature of the business

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CREDIT APPROVAL (under
Shariah perspective)
SPECIFIED Commodities study in
respect of
Uniqueness
Pricing
Active Market
Risk Profile
Cash Flow Analysis
Commitment Fee not permissible.
After these consideration limit may be approved

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CONTINUED
 The Client orders the institution to
buy certain goods for him and sell him
the same after acquiring. The
prerequisite is that the goods are not
already owned by the client.
At this stage the customer promises
the institution to buy the goods which
were acquired by the institute on his
request.

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 CONTINUED
If the supplier is nominated by the
client himself, guarantee for good
performance can be demanded.
 An advance payment (called Hamish
jiddiyyah) may be received from the
customer as a form of security
deposit.
 In case of breach of promise Hamish
Jiddiyyah can be used to recover
actual damage however it cannot be
used for covering the Cost of Funds /
Opportunity Cost.

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STAGES OF MURABAHA

AGENCY STAGE

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AGENCY STAGE
Agency Agreement is not the condition
of the Murabaha if the institution can
make direct purchases from the supplier.
 The financial institution, does not have
the expertise to identify the goods and
negotiate an efficient price.
 The customer, however, being in the
industry, can do this.
 The institution therefore appoints him
as its Agent (which is also permissible), in
the first step of the transaction, to identify
and procure the goods on institution
behalf.

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 AGENCY STAGE
This is done by execution of Agency
Agreement between the institution and
the customer.
However according to Sharia
Perspective it is preferable to appoint the
Agent other then customer.
If goods are acquired from third party
the execution of agency agreement will
be between the institution & the third
party.

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 AGENCY STAGE

TYPES OF AGENCY AGREEMENT

1. GLOBAL AGENCY AGREEMENT

When the purchase of commodity is not of consistent
nature.
2. SPECIFIC AGENCY AGREEMENT
When the purchase of commodity is of consistent nature.

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 STAGES OF MURABAHA

ACQUIRING POSSESION

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 ACQUIRING POSSESION

Advance payment can be made to the

supplier.

Discount On Acquisition Of Assets

Discounts from supplier (If any) would be passed on to the

customer at the time of Murabaha Sale by reducing the cost of
sales.

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 ACQUIRING POSSESION

If there is a rise in prices and the

amount escalates for which financing is
availed than the transaction can only be
executed if the bank has been informed
and the bank subsequently accepts the
same.
The institution reserves the right to
reject the purchases if made other then
agreed price.
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 ACQUIRING POSSESION
Change of commodity in the agency
agreement can be done with mutual
consent.
Delay in Supply from the Supplier.
Delay in Supply from the supplier in case
where specific time was allowed leads to
the revocation of agency agreement. In
such cases the customer will refund the
cost of goods.

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 ACQUIRING POSSESION
Rejection On Ground Of Quality

If the customer rejects the goods on ground of

inferior quality before the execution of Murabaha,
new quality can be acquired through new
Murabaha.
After execution of Murabaha the bank will not be
liable for any discrepancies.
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 ACQUIRING POSSESION


 Acquisition Of Title & Possession

Of The Asset

1. Institution must take actual or constructive

possession of the item .
 The forms of taking delivery or possession of items
differ according to their nature and customs.
 The item must move from the responsibility of the
supplier to the responsibility of the institution .
 It is obligatory that the point when the risk of the
item is passed on by the institution to the customer,
be clearly identified. 32
ACQUIRING POSSESION

2.Goods must exists at the time of execution

of Murabaha.
 If the above two are not fulfilled than the
institution cannot execute Murabaha.
 Documentary evidence required at the
time of possession before execution of
Murabaha i.e delivery challan, gate passes
and sales tax invoices.
 Murabaha payment to be made directly to
the supplier by the bank.
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 ACQUIRING POSSESI

Importance of Physical Inspection

Registrationis in the name of institution

for those items where registration is
required.

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 STAGES OF
MURABAHA

EXECUTION OF
MURABAHA
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 Customer,
EXECUTION

OF as an Agent, confirms that goods have
MURABAHA
been purchased & same are in his possession and that
payment has been made to the supplier.

 Customer makes an offer to purchase the goods from the

institution.

 Institution accepts the offer by stating the Cost price plus

amount of Profit and the due date for Payment by which
sale is concluded.

 At this stage relation of a buyer & seller comes into operation

between the institution & the client, & since the sale is
effected on deferred payment basis, the relation of debtor and
creditor also emerges between them simultaneously.
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EXECUTION OF MURABAHA

 Customer having received delivery of

Goods as per Purchase Requisition
confirms that goods have been
examined and are satisfactory in respect
of quality and
suitability for his use.
 The customer also releases the
institution from any liability in respect
of the goods in any manner
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AFTER EXECUTION OF
MURABAHA
Securities Against Murabaha Price
 The institution may ask the customer to
furnish a security to its satisfaction for
prompt payment of the deferred price.
 However, it is also permissible that the
customer furnishes a security at earlier
stages but after the Murabaha price is
determined.
 It is also permissible that the sole
commodity itself is given to the seller as a
security.
 It is preferable not to take Interest bearing
instruments as securities.

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AFTER EXECUTION OF
MURABAHA
CASE OF DEFAULT

 In the case of default by the buyer in the payment of

price at the due date, the price cannot be increased.
 However if he has undertaken, in the agreement to
pay certain amount for a charitable purpose, he shall
be liable to pay the amount undertaken by him.
 But this recovered amount from the buyer will not be
considered penalty nor compensation, therefore it
will not account to institutions income.
 Institution is bound to spend it for a charitable
purpose on behalf of the buyer.

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 ISSUES IN MURABAHA
Rebate in Early Payment
If the customer makes early payment and there
is no commitment from the institution in respect
of any discount in the price of Murabaha, than
the institution has the sole discretion in allowing
them the rebate.
Rollover in Murabaha
Rescheduling is allowed but repricing is not
allowed.
Rollover is also not allowed. 40
 ISSUES IN MURABAHA

Buy Back
 Under Murabaha Financing once the goods
purchased by the client from the Bank the same
goods cannot be Pledged/ Hypothecated for raising
finance facility from the Islamic Bank.
Rebate on Early Payments
 It is prohibited by Shariah Standards to give Rebate
to the client on early payment as under Murabaha
the price is fixed.
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 Murabaha

Step by step Murabaha financing

1. Client and bank sign an

agreement to enter into Murabaha.

Islamic Client
Bank Agreement to
Murabaha

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 Murabaha
Step by step Murabaha financing

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

Bank Client
Agreement to
Murabaha
Agency
Agreement
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Murabaha
Step by step Murabaha financing

3. Bank gives money to client for purchase of goods.

Islamic
Bank
Bank Client
Agreement to
Murabaha

Agency
Agreement
Disbursement to the client 44
 Murabaha
GENERAL MECHANICS

VENDOR ISLAMI BANK Agreement CUSTOMER

C

•
The customer approaches the Bank with the
request for financing
The Bank purchases and receives title of ownership
from the vendor
The Bank makes payment to the vendor
The Bank transfers the title over to the customer upon
payment
The customer makes payment up-front or on a
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deferred basis
ACCOUNTING ENTRIES FOR
MURABAHA
2 Accounting Entries

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MURABAHA EXPLAINED

 https://www.youtube.com/watch?v=rAv-pr_kct8

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MURABAHA SAMPLE CASE

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Risk Management
IN
MURABAHA

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 Credit
Risk
Dimensions Liquidity
Credit
Credit

Interest Rate
Banking
Risks
Market
Islamic Banks also face
-Additional asset risk Foreign Exchange
-Greater fiduciary risks
-Greater
Solvency
legal risk

Operational
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Legal and Shari’a Risks
 Legal and Shari’a compliance risk
 Completeness of Legal documentation for various contracts
 Adherence to AAOIFI Shari’s standards
 Role of Shari’a supervisory boards/ advisers in mitigating Shari’a risk
 Live cases
 Mistiming in signing of Commodity Murabaha contracts can lead to lost
income

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 RISK IN Murabaha

 Title to assets transferred to the customer at the time

of purchase
 Usually the customer then provides same or other assets
as collateral.
 Role of purchasing department is essential while
customer is taking from various institutions banking
murabaha facility.

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END OF PRESENTATION

JAZAKAMUALLAH

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