MURABAHA Instructor: Dr.

Abidullah
TYPES OF SALES
Musawama (Sale at negotiated price)
 Sale on agreed price without disclosing the original cost plus profit.
 Payment on spot

Murabaha (Cost plus profit sale)

 The price of the object is disclosed.
 Profit Margin is disclosed.
 May be deferred or on-spot.

Bay al-Muajjal (Credit Sale)

 The cost+margin is not disclosed
 Payment is deferred

Bay al Salam/Istisna (Forward Sale)

 Price is paid and the delivery is at future date.
PROCESS OF MURABAHA TO
THE PURCHASE ORDER
1. Unilateral Promise between Client and the Bank.
2. Agency contract
3. Purchase on behalf of the bank
4. Offer to purchase by the client
5. Signing of Murabaha Agreement
At the first stage, this is not an actual sale. It is just a promise to effect a sale in
future on murabahah basis.
At the second stage, the relation between the parties is that of a principal and an
agent.
At the third stage, the relation between the institution and the supplier is that of a
buyer and seller.
At the fourth and fifth stage, institution and client’s relationship becomes creditor
and debtor.
 SOME BASIC RULES OF SALE
Rule 1. The subject of sale must be existing at the time of sale.
Rule 2. The subject of sale must be in the ownership of the seller at the time of sale.
Rule 3. The subject of sale must be in the physical or constructive possession of the seller when he sells it to
another person.
Rule 4: The subject of sale must have valid usage.
Rule 5. The subject of sale must be specifically known and identified to the buyer.
Rule 6. The delivery of the sold commodity to the buyer must be certain and should not depend on a
contingency or chance.
Rule 7. The certainty of price is a necessary condition for the validity of a sale.
Rule 8. The sale must be unconditional unless condition is recognized as the part of the transaction or usage of
trade e.g. warranties etc.
Rule 9. The sale must be instant and absolute.
Rule 10. The subject of sale must be a property of value.
MURABAHA
Murabahah is a particular kind of sale where the seller expressly mentions the cost of the sold
commodity he has incurred, and sells it to another person by adding some profit or mark-up
thereon.
The profit in murabahah can be determined by mutual consent, either in lump sum or through an
agreed ratio of profit to be charged over the cost.
All the expenses incurred by the seller in acquiring the commodity like freight, custom duty etc.
shall be included in the cost price and the mark-up can be applied on the aggregate cost.
However, recurring expenses of the business like salaries of the staff, the rent of the premises etc.
cannot be included in the cost of an individual transaction.
Murabahah is valid only where the exact cost of a commodity can be ascertained otherwise use
Musawama.
Once the price is set in the contract, it cannot be changed even if pre-agreed between the parties.
MURABAHA AS MODE OF
FINANCING
Originally, murabahah is a particular type of sale and not a mode of financing.
The ideal mode of financing according to Shari‘ah is mudarabah or musharakah.
Shari‘ah experts have allowed, subject to certain conditions, the use of the
murabahah on deferred payment basis as a mode of financing.
there are two essential points which must be fully understood in this respect:
 It should never be overlooked that, originally, murabahah is not a mode of financing.
 The second important point is that the murabahah transaction does not come into existence by merely
replacing the word of “interest” by the words of “profit” or “mark-up”.
ISSUES IN MURABAHA
FINANCING
1. Securities against Murabaha
• Mortgage, pledge or hypothecation

2. Guaranteeing Murabaha
 The Guarantor cannot charge a fee from original client.
 The Guarantor can charge for expenses related to Documentation.

3. Penalty of Default
 The Bank can charge Penalty subject to the following conditions
 The Defaulter may be given a grace period of at least one month
 If it is certain that the client is defaulting without a valid excuse.
 The penalty should not become the part of Banks’ profit.
1. Rollover in Murabaha
 Rollover not allowed beyond the contract expiry date.
 The sale is already executed and the Bank has the right to receive the payments
 Rollover in such case act as a new sale contract.

2. Rebate on Early Payments

 Not a compulsion
 Can be a voluntary act

3. Calculation of Cost in Murabaha

 Only direct costs

4. Subject Matter
 All condition of valid subject matter applies.
BASIC FEATURES OF
MURABAHA FINANCING
Murabahah cannot be used as a mode of financing except where the client needs
funds to actually purchase some commodities.
Signing the documents without understanding the specifications of the subject
matter.
If commodity is not in the possession of the financier, whether physical or
constructive, in the sense that the commodity must be in his risk, though for a short
period.
The customer can act as agent of Bank to purchase commodity.
The sale contract on already purchased commodities.
CONDITIONS
Primary Condition
 Must posses the elements of valid sale.
 Goods must be existing and in either constructive of physical possession of the seller.

Goods Subject to Murabaha Sale

 Tangible Items
 Intangible Items

Costs related to Murabaha

 All direct and indirect costs must be in knowledge of both parties
 Both parties must agree on the price.

Mark-up or Profit
 Fixed or percentage of the cost of the Murabaha item.
 Must be clearly stated (cost and profit)
The seller of the Good
 The seller must be a third party.

Defect
 The defects must be disclosed by the seller
 Risk of loss or any concealed defect in the asset is borne by the Bank.

Ownership
 Bank is the owner of the assets
 Ownership risk belongs to the bank unless the ownership is transferred to the client

Advance payment
 Advance payment made by the client becomes the part of the total price of the asset.
Delivery of the item
 Delivered to the client immediately and the ownership is transferred

Repayment
 Spot or deferred

Security
 Asset of the murabaha contract can be treated as security
 Lien on the basis of hypothecation, pledge or mortgage.
 Third party guarantee (fee issue)
 Promissory note

Rollover
 Rollover is possible however the price cannot be revised.

Delay in Payment
 No extra amount could be charged.
 If a solvent client fails to pay  legal action
 If insolvent  leniency
APPLICATION OF MURABAHA
1. Raw Material
2. Inventory
3. Equipment
4. Asset Financing
5. Import Financing
6. Export Financing (Pre-Shipment)
7. Consumer Goods Financing
8. House/Vehicle/Land/Shop Financing
9. Tour Packages
10. Education Packages
11. Securitization
 LETTER OF CREDIT
a) The importer or customer asks the Islamic bank to open a L/C to import goods
and provides all necessary information.
b) The bank checks the application and documents, secures the necessary guarantees
and then opens the L/C in favour of the customer.
c) Copies of the L/C are sent to the correspondent bank and the exporter.
d) A Murabaha with a promise contract is signed between the Islamic bank and the
importer, where both parties mutually agree on the costs of the goods and all
other delivery costs and conditions.
e) The exporter ships the goods and hands over the shipping documents to the
correspondent bank.
f) The correspondent bank sends the shipping documents to the Islamic bank.
g) The Islamic bank’s ownership of the goods is confirmed once it accepts the
documents.
h) The Islamic bank finally sells the goods to the importer on a cost plus markup
basis.
i) The importer pays the bank on a deferred basis – lump sum or instalments as per
the mutually agreed schedule.