MURABAHA
FINANCE
A PRESENTATION BY:
MUHAMMAD TAYYAB RAZA
Islamic Banking - ABN AMRO (Pakistan) Limited
At Specialized AlHuda CIBE Workshop at Avari Hotel
2
LEARNING OBJECTIVES
Conceptual understanding of Murabaha
Stages involved in Murabaha
Transaction
Practical issues in Murabaha and their
resolution
Murabaha Documentation
Uses of Murabaha as Mode of Finance
(Local as well as import Murabaha)
3
DERIVATION OF MURABAHA
The word Murabaha has been
derived from the Arabic word
Ribah, which has literary meaning
of profit.
4
DEFINITION OF MURABAHA
5
WHAT IS SALE?
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.
6
COMPONENTS OF VALID SALE
SALE
MODEL - II
THREE PARTY RELATIONSHIP
(Bank-Vendor) and Customer
MODEL - III
THREE PARTY RELATIONSHIP
Bank and (Vendor-Customer)
13
MODEL - I
Thesimplest possible Model emerges
when the transaction involves two parties
only, i.e Bank and the Customer.
TheBank is also vendor and sells the
Asset(s) to its Customers on deferred
payment basis.
FromShariah perspective it is an ideal
Model and its profits are fully justified
because Bank assumes all risks as
Vendor/Trader. 14
MODEL I GRAPHICAL PRESENTATION
Customer Bank/Vendor
3
15
MODEL I - PHASES
Phase 1:
The customer approaches Bank (Vendor) and
identifies Asset(s) and collects relevant
information including cost and profit.
Phase 2:
Bank sells Asset(s) to the Customer, transfer risk
and ownership to the Customer at certain
Murabaha Price.
Phase 3:
Customer pays Murabaha Price in lump sum or in
installments on agreed dates.
16
MODEL - II
Inmost cases Murabaha Transaction
involves a third party (i.e. Vendor)
because Bank is not expected to engage
in sale of variety of products required
for variety of Customers.
1 3
4
Vendor
5
2
6
Customer Bank
19
MODEL II - PHASES
Phase 1:
Customer identifies and approaches the Vendor
or Supplier of the Asset(s) and collects all
relevant information.
Phase 2:
Customer approaches the Bank for Murabaha
Financing and promises to buy the Asset(s).
Phase 3:
The Bank makes payment to vendor directly. 20
MODEL II PHASES
Phase 4:
Vendor delivers the Asset(s) & transfers the
ownership of Asset(s) to the Bank.
Phase 5:
Bank sells the Asset(s) to Customer on cost
plus basis and transfers ownership.
Phase 6:
Customer pays Murabaha Price in lump sum
or in installments on agreed dates. 21
MODEL III BANKING MURABAHA
It
is called Murabaha to the Purchase
Orderer .
23
MODEL III BANKING MURABAHA
3
4
Vendor 5
6
Offer Acceptance Bank
Customer
1 25
7
PHASE I PROMISE TO PURCHASE AND SELL
Types (Global/Specific)
Description of Asset(s) to be purchased
Mode of Disbursement of Funds
Roles and Responsibilities of Agent
35
PHASE VI
MURABAHA EXECUTION STAGE
(OFFER AND ACCEPTANCE)
The Customer offers to buy the Asset(s) from
the Bank which it has purchased as an Agent
of the Bank.
40
PHASE VI
MURABAHA EXECUTION STAGE
DOCUMENTATION
c) PAYMENT SHEDULE SUMMARY
Import Export
Murabaha Murabaha
Pre-shipment Post-shipment
46
USE OF MURABAHA IN IMPORTS
Agency Agreement must be signed before
opening of L/C in case of imports.
All costs/charges (e.g SWIFT charges, L/C
Opening commission) shall be included in the
cost of Murabaha Asset.
Offer and Acceptance may be signed when
the Asset(s) arrived at port.
In case of Usance L/C, Murabaha execution
stage is offer and Acceptance stage even
though the payment is made after usance
period. 47
USE OF MURABAHA IN EXPORTS
50
Rise in Prices of Asset(s)
If there is a rise in prices and the amount
escalates for which financing is availed then
the transaction can only be executed if the
Bank has been informed and the Bank
subsequently accepts the same.
52
Delay in Supply from the Supplier
53
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 a Murabaha Transaction
would imply that payment of earlier
Murabaha Price by executing new
Murabaha.
55
Partial Murabaha
56
Murabaha with Related Parties
58