MURABAHAMurabaha is a particular kind of sale where the seller discloses its cost and profit charged thereon. The price in this sale can be both spot and deferred. SCOPE OF MURABAHA It is 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. PROCESS FLOW OF MURABAHA Customer submits the purchase requisition to the bank. Customer may be appointed as agent to purchase goods on bank s behalf. Bank gives money to supplier either directly or through Customer s account for purchase of goods. Customer purchases goods on bank s behalf and takes their possession. Customer makes an offer to purchase the goods from the bank. Bank accepts the offer and sale is concluded. Customer pays agreed price to bank according to an agreed schedule. SECURITIES AGAINST MURABAHA - The Bank may ask the customer to furnish a security to its satisfaction for prompt payment of the deferred price. - It is also permissible that the customer furnishes a security at the inception of the Relationship but it becomes effective after the creation of Customer s indebtedness. - It is also permissible that the sold commodity itself is given to the seller as a security. - It is preferable not to take Interest bearing instruments as securities. PURCHASE REQUISITION .The Customer requests the Bank to buy certain goods for him and sell these to him after taking ownership and possession. Purchase requisition contains the details of the goods required to be purchased from the Supplier. .The prerequisite is that the goods are not already owned by the Customer. They should always be bought from a third party. their Cost and expected date of delivery. . PERSONAL GUARANTEE . guarantee for good performance can be demanded. .If the supplier is nominated by the Customer himself. .In case of breach of promise.An advance payment (called Hamish Jiddiyyah) may be received from the customer as a form of security deposit .HAMISH JIDDIYYAH . However it cannot be used for recovering the Cost of Funds / Opportunity Cost. Hamish Jiddiyyah can be used to recover actual damages. .DISCOUNT ON ACQUISITION OF ASSETS . in case of Suppliers Credit. the term of credit must be identical or longer.Similarly. .Discounts from Supplier (If any) would be passed on to the customer at the time of Murabaha Sale by deducting these from the cost because Murabaha is always a Cost-plus Sale. .CHANGE OF COMMODITY .Change of commodity(ies) specified in the agency agreement can be done with mutual consent. .The Bank reserves the right to reject the purchases if made at other than agreed price. .INCREASE IN PRICES . then the transaction can only be executed if the bank has been informed and accepts such increase.If there is an increase in prices and the cost escalates. In such cases the customer will refund the cost of goods. leads to the revocation of the contract of Purchase and(in some cases) the Agency Agreement. .DELAY IN SUPPLY FROM THE SUPPLIER . in case where specific time was allowed.Delay in Supply from the supplier. The Commodity must move from the responsibility of the supplier to the responsibility of the Bank.Bank must take actual or constructive possession of the Commodity(ies).The forms of taking delivery or possession of Commodity(ies) differ according to their nature and customs. . . . are clearly identified. .It is obligatory that the points in time when the risk of the item is passed on to the Bank by the Supplier and by the Bank to the customer.ACQUISITION OF TITLE & POSSESSION OF THE ASSETS . ..ACQUISITION OF TITLE & POSSESSION OF THE ASSETS .g. delivery Challan.Goods must exists at the time of execution of Murabaha. then the Bank cannot execute Murabaha . gate passes and sales tax invoices must be obtained at the time of acquisition of Goods before execution of Murabaha. e. -If the above two requirements are not fulfilled.Documentary evidence. Bank is bound to spend it for a charitable purpose on behalf of the Customer.This amount will neither be considered penalty nor compensation and it will not form a part of Bank s income.However. .In the case of default by the Customer in the payment of price on the due date. then Customer shall be liable to pay this amount to a Charity Account separately maintained by the Bank.CASE OF DEFAULT . if Customer has undertaken in the agreement to pay certain amount for a charitable purpose. . the price cannot be increased. . . then the Bank has the sole discretion in allowing a rebate.But it is prohibited by Shariah Standards to give Rebate to the Customer on early payment as under Murabaha the price is fixed. .REBATE ON EARLY PAYMENT . So it is recommended that issue should be brought to the knowledge of Shariah Advisor.If the customer makes early payment and there is no commitment from the Bank in respect of any discount in the price of Murabaha. . Rollover is also not allowed. .Rescheduling is allowed but re-pricing is not allowed .ROLLOVER IN MURABAHA . BUY BACK . once the goods have been purchased by the Customer. .Under Murabaha Financing. the same goods cannot be sold and bought back for availing finance facility from the Islamic Bank. MURABAHA DOCUMENTATION Master Murabaha Facility Agreement Agency Agreement Order Form / Draw Down Notice/Purchase Requisition Declaration with Purchase Evidence Demand Promissory Note Payment Schedule . Master Murabaha Financing Agreement It is an agreement between the Customer and the Bank whereby the Customer agrees to purchase goods from the Bank from time to time as per the terms and conditions of the agreement. This is an overall facility agreement under which various Sub-Murabaha may be executed from time to time Hence it needs to be signed once at the time the facility is sanctioned. . The customer should provide a comprehensive list of assets and commodities that he may procure during the course of business from time to time. The disbursement of funds is made under this agreement. This agreement needs to be signed once between the Customer and the bank to cover the specified agency period. . the Bank appoints the customer as its agent to select and procure specified goods for the Bank.Agency Agreement Through this agreement. e. the customer requests the bank to purchase the assets from the supplier and undertakes that he will purchase the assets from the bank once the bank acquires the asset from the Supplier. each time when the customer requires Murabaha for purchase of assets. i. Through this document. The customer also undertakes to compensate for the actual loss the bank may suffer in case he fails to purchase the assets from the bank. ..Order Form This document is executed at the time of each subMurabaha request. .e.Declaration This is the most important part of the Murabaha process Declaration is to be signed by the customer immediately after the purchase of goods as Bank s agent and before their consumption. quantity. cost etc. i. quality. This document establishes the actual sale transaction.e. continued . transfer of ownership of goods from the Bank to the Customer At this stage the specific details of the assets must be known i. sales tax invoice. sale invoice. Proper timing of declaration is extremely important especially in cases of perishable or immediately consumable commodities.Purchase evidence in the form of bills. transportation and handling etc. must be furnished along with the Declaration specifying the full details of the goods purchased The cost of goods must be inclusive of all costs including sales tax. . Murabaha Price (Cost of Goods + Profit) should be determined at this stage and stated clearly in the Declaration. This shall be prepared after the execution of Declaration The dates mentioned in the schedule correspond to the day when the payment becomes due from the Customer. . towards the settlement of Murabaha Price.Payment Schedule The Payment Schedule specifies the amount that Customer will pay from time to time or in lump sum. Profit Recognition 6. Direct Payment 5.PRACTICAL ISSUES IN MURABAHA 1. Timing of Offer & Acceptance 3. Penalty on Late Payment 7. Rebate on Early Payment 8. Rollover in Murabaha 9. Training of Customer & Bank Staff 10. Subject Matter 2. Purchase Evidence 4. Process of Murabaha may differ from Product to Product . Silver. Murabaha cannot be used for paying utility bills. . Currencies. Gold.g.. overhead expenses etc. wages.Subject matter of Murabaha Goods must exist at the time of execution of Murabaha Murabaha cannot be done in all commodities e. General rules of sale related to subject matter must be followed. Timing of Offer & Acceptance A Murabaha Financing Agreement consists of a series of documents to be executed at various stages. Through the Declaration which contains Offer & Acceptance. the Customer and the bank complete an important step of a valid Murabaha Sale. . Offer & Acceptance must be signed while the goods are still in existence and have not been used in the production process or sold to some other entity. This is to be signed by the customer when he has purchased and taken possession of the goods as the Bank s Agent. the sequence and timing of which is extremely important. . It is suggested to furnish considerable sample of invoices along with summary of all purchases. For example. however. the customer is required to submit asset purchase evidence along with Offer & Acceptance . delivery orders. cotton purchases are generally in small quantities from various sources and hence for each Sub-Murabaha there may be too many invoices to submit.Purchase Evidence In order to ensure that the customer actually purchased the assets as claimed. The purchase evidence must confirm that the asset was purchased after the Agency Agreement Purchase evidence may be in the form of invoice. In some cases. truck receipts etc. it may be too burdensome for the Customer to submit all the invoices as the number of invoices may run into hundreds. . However. the Murabaha Price becomes a receivable for the Bank. it is permissible to obtain an undertaking from the customer that in case of delay/default in payment of Murabaha Price or any part thereof. he will pay an amount of money or a percentage of the debt to be spent for charitable purposes at the discretion of the Bank.Penalty on Late Payment As soon as the Murabaha is executed. any amount charged over and above the Agreed Amount will be RIBA. Hence. then the Bank has the sole discretion in allowing the rebate. Such issue should be brought to the knowledge of Shariah Advisor. .Rebate on Early Payment If the customer makes early payment and there is no commitment from the Bank in respect of any discount in the price of Murabaha. It is not recommended to make it a practice and must be avoided in normal course of business. A new Murabaha can only be executed for the purchase of new assets. It is advisable that whenever practicable there must be a gap of 1-2 days between maturity of the previous Murabaha and disbursement of the new one.Rollover in Murabaha Rollover in Murabaha is not allowed since each Murabaha transaction is for the purchase of a particular asset. . RISK DIMENSIONS Credit Liquidity Pricing Banking Risks Competition Foreign Exchange Solvency Operational . IJARAH . Anything which cannot be used without consuming cannot be leased out.. Wheat etc. . Money. identified and quantified. e.g. The Asset should be a thing of value.Definition and Basic Conditions Transferring of usufruct (body) of an asset to another person for an agreed period. at an agreed consideration. Expenses under Ijarah are as follows: Lessor expenses relating to the corpus of the asset i. Accidental Repairs etc. The rental decided at the time of the agreement cannot fluctuate except in the manner agreed between the Parties. .e. Therefore.Difference between Ijarah & Conventional Lease Two contacts into one contract is not permissible in Shariah. Insurance. we cannot have the agreements of hire and purchase combined into one agreement but we can undertake / promise to purchase/sell the leased asset such that the promise is binding only on the Promisor Ijarah rental can only be charged after delivery of asset to the Lessee. will be borne by the Lessor Continued«««««. the Lessor cannot charge rent for that period unless the Lessee is found guilty of misuse of the assets. In case. the insurance claim is rejected. negligence or of willful misconduct . In case the asset is not working or breaks down. the loss will be borne by the Lessor (Bank) and not the Lessee.Lessee actual operating / overhead expenses and routine maintenance charges related to use of the asset will be borne by the Lessee. All risks and rewards are for the account of the Lessor. the rent will start immediately. Murabaha attributed to a future date is invalid in Shariah. while in lease only the usufruct is transferred to the Lessee and the risk remains with the Lessor. In Ijarah. if the Lessee acts as the bank s agent and makes any payment. .Difference between Ijarah & Murabaha In Murabaha once the sale is completed. but Lease can be attributed to a future date. because in leasing the asset remains under the risk and ownership of the Lessor throughout the leasing period. the entire risk is shifted to the purchaser. But in Leasing it is permissible. Once he has taken possession. the sale would be effected spontaneously upon the Agent taking delivery from the supplier. The seller would never bear the risk of the commodity which Shariah does not permit. A Murabaha cannot be attributed to a future date as in this case. he is not required to inform the bank that he has taken possession as is the case in Murabaha. Pricing Criteria in Islamic Banking Some instruments for handling the Price Risk:1. 6. 4. 2. 5. No long term Murabaha Adjustment in subsequent deals Floating rate in Ijarah Tiered profit in Musharakah / Mudarabah Capping of profit in Musharakah / Mudarabah Reviewing of profit ratios in Musharakah / Mudarabah Voluntarily withdrawal from any amount due by any of the parties . 3. 7. 8. is not against the rules of Shariah. Tenure of Lease agreement must be fixed & specified in clear terms Continued . The determination of rental on the basis of the aggregate cost incurred in the purchase of the asset by the Lessor. provided that the amount of rent for each period is either specifically agreed upon at the time of affecting the lease or prior to the beginning of each such period. It is permissible that different amounts of rent are fixed for different periods during lease tenor. as is normally done in financial lease.BASIC RULES OF IJARA The rental must be determined at the time of contract for the whole period of lease. In case the customer is acting as an agent of the bank for Insurance. Insurance cost incurred by the bank must be recovered in the lease rentals.The rentals for the first period must be fixed at the time of execution of Lease Agreement and will remain fixed till the first rental revision date. Specific date of each periodic rental becoming due must be clearly mentioned in the rental schedule. . the customer will pay the insurance premium but this cost will be reimbursed to the Customer by the bank. Purchase date and respective purchase price must be mentioned clearly in the undertaking to purchase. Rent should be charged after the delivery of the lease asset Different relations of the parties There are two separate relations between the Bank and the Customer: one of an agent and the other of a Lessee. Hence.IJARA AS A MODE OF FINANCING The commencement of lease Unlike the contract of sale. it is different from Murabaha. Continued . the agreement of Ijarah can be effected for a future date. 5%) after a specified period (e.. Continued .Expenses consequent to ownership to the Lessor As the Lessor is the owner of the asset.g. 1 year) He can contract lease for a shorter period after which the parties can renew the lease at new terms and by mutual consent.g.. he is liable to pay all the expenses incurred in the process of its purchase and its import to the country of the Lessor. Lessee as Ameen The Lessee is responsible for any loss caused to the asset due to misuse or negligence. He is also liable for normal wear and tear Variable Rentals in Long Term Leases In this case the Lessor has two options: A lease contract can have a condition that the rent shall be increased according to a specified proportion (e. for example freight and customs duty etc. He can.Charity for late payment of Rent The Lessor cannot charge an additional amount in case the Lessee delays payment of rent. however. the Lessor may enter into a unilateral undertaking to sell the leased asset to the Lessee at the end of the lease period. This undertaking will be binding on the Lessor only. However. Continued . The residual value of the leased Asset Even after the expiry of the lease period. It is a well settled rule of Islamic jurisprudence that one transaction cannot be tied up with another transaction so as to make the former a pre-condition for the other. the corpus of the leased asset cannot be transferred to the Lessee through the agreement of lease itself. because in this case the lease becomes a contract of hire purchase. recover an amount to be spent for charity. Secondly the promise should be unilateral and binding on the Promisor only. subject to payment of all rentals as agreed. in such a case he cannot charge rentals for the remaining period. itself should not be subjected to the signing of this promise of sale or gift. it should be at the expense of the Lessor and not at the expense of the Lessee. the agreement of Ijarah. whether under the Islamic mode of Takaful or conventional insurance. If not. However. Ijarah Wa Iqtina The Lessor may sign a separate promise to gift the leased asset to the Lessee at the end of the lease period.Termination of lease If the Lessee contravenes any term of the agreement the Lessor has a right to terminate the lease contract unilaterally. Takaful/Insurance of the Asset If the leased property is insured. The validity of this arrangement is subject to two basic conditions: Firstly. Continued . then it can be terminated through mutual consent only. There should be a time lag between the execution of the two agreements Asset cannot be sold back to the Customer before one (1) year passes. Sale and leaseback transaction Sale Agreement must be executed before entering into Lease Agreement. the Lessee cannot sublease the leased asset except with the express permission of the Lessor. even on the occurrence of an event of default. .Sub-Lease If the leased asset is used differently by different users. a Sale Deed is not executed to effect transfer of ownership. the insurance claim received is shared with the Customer although the Customer has no right to claim such benefit. taxes etc are not added to the Cost of the Asset.Insurance Expense is not reimbursed to the Customer In case of loss / damage.No Insurance Agency agreement is executed with the Customer .PRACTICAL ISSUES Expenses such as Import duties. At the time of maturity or early termination of Lease Agreement. Where Customer himself / herself arranges Insurance:. . IJARAH FINANCING FOR ASSETS IMPORTED VIA SIGHT LC . IMPORT IJARAH The Importer opens the LC as an agent of the Bank The Importer places order with the foreign supplier on behalf of the Bank Upon receipt of documents. rental would be charged once the asset becomes workable/usable by the Lessee or is delivered to him. the bank may sell the asset to the importer at an agreed price. . However. A specified rental will be agreed at this point in time. After the term of Ijarah Agreement is completed. the Bank makes payment to the foreign supplier The Ijarah Agreement with the Customer becomes effective. IJARAH FINANCING FOR ASSETS IMPORTED VIA USANCE LC . FBL appoints the customer as its agent to import the asset and pay relevant duties. All such payments made by Importer shall be reimbursed by Bank and will constitute a part of the total cost of the asset. Under Ijarah Agency. . and other charges to port authorities for securing the release of the asset. FBL and the Customer enter into an Ijarah Agency Agreement listing the assets to be imported. transportation.IMPORT IJARAH After necessary approvals. taxes. The customer takes delivery of the asset as bank s agent and pays the applicable duties and taxes etc. After installation of asset. Ijarah Agreement between the Bank and the Customer becomes effective and the lease rentals start in the manner agreed .IMPORT IJARAH (Cont d) At the time of execution of Lease Agreement. . Forward Cover is taken to fix the cost of the imported goods in PKR.