Topic Five:

Islamic Financing
Instruments: Murabaha
 DERIVATION OF
2 MURABAHA
 The word “Murabaha” has been derived
from the Arabic word “Ribh”, which
has literary meaning of profit.

 The Murabaha can be denoted as “Sale

With Profit”.
3
DEFINITION OF MURABAHA
 
Murabaha is a particular kind of sale
where Seller expressly mentions the
cost it has incurred on purchase of the
Asset(s) to be sold and sells it to
another person by adding some profit,
which is known to Buyer.
 WHAT IS SALE?
4

Sale is defined in the Islamic Fiqh as

follows:

“Exchange of a thing(subject
matter) of value with another thing
of value, with mutual consent”.
 COMPONENTS OF VALID SALE
5

SALE

CONTRACT SUBJECT PRICE POSSESSION

MATTER

•Offer/Acceptance •Existence •Quantified •Physical

•Buyer/Seller •Ownership •Certain •Constructive
•Possession
•Valuable
•Specific
•Halal Purpose Instant and absolute
•Delivery Unconditional
Financing Products
 Consumer Financing Products
 Home Financing
 Education Financing
 Hire Purchase (Ijarah Thuma Al-bay’)

 Corporate Financing Products

 Trade Financing
 Working Capital Financing
 Fixed asset Financing
Consumers Financing
Requirements
To
finance
personal
needs

To CONSUMER To
purchase REQUIREME purchase
house NTS vehicle

To
finance
purchase
of
services
House Financing Facility
FACT OF THE CASE:
 A customer want to buy a house from a developer

or vender.
 He had paid 10% deposits for the price of the house

he have identified.
 He did not have enough money to make payment

for the balance of 90% for the price of the house.

 He plan to apply a house financing facility from an

Islamic bank.
Application Of Shari’ah Principle In House
Financing Product

Musharaka
Mutanaqisa

To
Istisna’
purchase Ijarah

house

Murabaha
Murabahah As a Mode Of
Financing
Murabahah
 Murabaha is a normal sale.
 Sale’ is defined in Shari‘ah as ‘the exchange of a thing
of value by another thing of value with mutual consent’.
 Most of the Islamic banks and financial institutions are
using murabahah as an Islamic mode of financing.
 If a seller agrees with his purchaser to provide him a
specific commodity on a certain profit added to his cost,
it is called a murabahah transaction.
 The payment in the case of murabahah may be at spot,
and may be on a subsequent date agreed upon by the
parties.
Some Basic Rules Of Sale.
1. The subject of sale must be existing at the time of
sale.
2. The subject of sale must be in the ownership of
the seller at the time of sale.
3. The subject of sale must be in the physical or
constructive possession of the seller when he sells
it to another person.
Murabahah As A 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. However, there are certain practical
difficulties in using mudarabah and musharakah
instruments in some areas of financing. Therefore,
the contemporary Shari‘ah experts have allowed,
subject to certain conditions, the use of the
murabahah on deferred payment basis as a mode of
financing
Basic Features Of Murabaha Financing

1. Murabahah is not a loan given on interest. It is the sale of

a commodity for a deferred price which includes an
agreed profit added to the cost.
2. Being a sale, and not a loan, the murabahah should fulfil
all the conditions necessary for a valid sale.
3. Murabahah cannot be used as a mode of financing except
where the client needs funds to actually purchase some
commodities.
4. The financier must have owned the commodity before he
sells it to his client.
5. The commodity must come into the possession of the
financier, whether physical or constructive.
Continue..
 The best way for murabahah, according to
Shari‘ah, is that the financier himself purchases the
commodity and keeps it in his own possession.
Murabaha
For types of a Valid sale
 Sale of goods on the same Price (no Profit
1.Wadhi’ah: 2.Musawamah:
Sale of goods with A bargaining sale
Valid Sale without disclosing
deduction of cost
price). cost price.

3.Tawliyah:
4.Murabaha:
Sale of goods on
Cost + Profit (Sell
the same Price (no
price) known to the
Profit
buyer.
.
the four types of Sale: Musawamah

Musawamah:

A barganing
sale without
disclosing
cost price and
profit
 1. Musawamaha is exchange of goods and price
without disclosing the profit and cost price.

Receives Money

Receives goods
Some Issues Involved In Murabahah

 The use of Interest-Rate as Benchmark Many Islamic Banks

financing by way of murabahah determine their profit or mark-
up on the basis of the current interest rate, mostly using
LIBOR as the criterion. For example, if LIBOR is 6%, they
determine their mark-up on murabahah equal to LIBOR or
some percentage above LIBOR.
 Promise to purchase the second issue of Murabaha is that the
bank/financier cannot enter into an actual sale at the time when
the client seeks murabahah financing from him, because the
required commodity is not owned by the bank at this stage and
one cannot sell a commodity not owned by him, nor can he
effect a forward sale.
 the Maliki and Hanafi jurists have accepted it as
binding on the promisor and enforceable through
the courts.
 The holy Qur’an Says:

“And fulfil the covenant. Surely, the covenant will be

asked about (in the Hereafter)” (Bani Isra’il : 34).
 However, There are certainly some sorts of

promises which cannot be enforced through courts.

 Securities Against Murabahah Price; The seller/financier
naturally wants to make sure that the price will be paid at the due
date. for this purpose, he may ask the client to furnish a security to
his satisfaction.
 Guaranteeing the Murabahah: The seller in a murabahah
financing can also ask the purchaser/client to furnish a guarantee
from a third party.
 Penalty of Default Another problem in murabahah financing is that
if the client defaults in payment of the price at the due date, the price
cannot be increased. In case of default in the payment of price at the
due date, the seller may have recourse to the guarantor, who will be
liable to pay the amount guaranteed by him.
 Rebate on earlier payment Sometimes the debtor wants to
pay earlier than the specified date. In this case he wants to
earn a discount on the agreed deferred price.
 The Holy Prophet said:

“Give discount and receive (your debts) soon”.

 the majority of the Muslim jurists, including the four
recognized schools of Islamic jurisprudence do not allow it, if
the discount is held to be a condition for earlier payment.
 Penalty of Default Another problem in murabahah financing is that if
the client defaults in payment of the price at the due date, the price
cannot be increased. In interest-based loans, the amount of loan keeps
on increasing according to the period of default. But in murabahah
financing, once the price is fixed, it cannot be increased. However,
some contemporary scholars have suggested that the dishonest clients
who default in payment deliberately should be made liable to pay
compensation.
 It is proved beyond doubt that the client is defaulting without valid
excuse. If it appears that his default is due to poverty, no compensation
can be claimed from him. because the Holy Qur’an has expressly said:
“And if he (the debtor) is short of funds, then he must be given respite
until he is well off”. (2:280)
 Rescheduling of payments in murabahah If the
purchaser/client in murabahah financing is not able
to pay according to the dates agreed upon in the
murabahah agreement, he sometimes requests the
seller / the bank for rescheduling the installments.
In conventional banks, the loans are normally
rescheduled on the basis of additional interest.
This is not possible in murabahah payments.
 Continues..
26

 Uses of Murabahah:
 Murabahah can be used in following conditions:

 Short / Medium / Long Term Finance for:

• Raw material • Inventory

 Education package financing

Equipment
• Asset financing
• Import financing
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• • Export financing (Pre-shipment)

• Consumer goods financing
• House financing
• Vehicle financing
• Land financing
• Shop financing
• PC financing
• Tour package financing
 The End
Thank You