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Sale Contract /Murabaha .

Muhammad Najeeb Khan

CONTRACT IN ISLAM
CONTRACT
SUBJECT MATTER
Specified Quantified

CONTRACTORS
Non-restricted Sane Mature

WORDING OF CONTRACT
Present Unconditional Non-contingent

Law of Contract
Islamic Contract: It is connection between the offer and the acceptance in a manner that results the proper affects. Offer Acceptance Subject matter

ISLAMIC SALE
DEFINITION OF SALE(BAI) exchange of a thing of value with another thing of value with mutual consent. the sale of a commodity in exchange of cash.

ISLAMIC SALE
(1)-VALID SALE ( Bai Sahih)
a sale is valid if all elements together with their conditions are present elements of valid sale are Contract ( Aqd ) Subject matter ( Mabee) Price ( Thaman ) Possession or delivery ( Qabza )

CONTRACT ( Aqd )
Offer & Acceptance ( Ijab-o-Qobool) Oral ( Qauli ) Implied ( hukmi ) Buyer and seller ( Mutaaquadeen ) must be Sane Mature

Conditions of contract ( Sharaet-e-Aqd )

sale must be non-contingent sale must be immediate

SOLD GOOD OR SUBJECT MATTER ( Mubee )

Existing Valuable Usable Capable of ownership/title Capable of delivery/possession Specific & Quantified Seller must have title & risk

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.

Difference between Murabaha & Musawima

Murabaha is a particular kind of sale where the seller discloses its cost and profit charged thereon .

Musawima is a sale on agreed price without referring to the first price on which the seller has purchased

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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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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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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. It cannot be used as a substitute for running finance facility , which provides cash for fulfilling various needs of the client.
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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.

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Step by Step Murabaha

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1- Promise stage
Stage One (a) for Murabaha financing
1

Client approach the bank for

facility through Murabaha.

Bank

Facility approved

Client

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1- Promise stage
Stage One (b) for Murabaha financing
1

Client

and to

bank

sign

an into

agreement

enter

Murabaha.
Bank
Murabaha Facility Agreement MOU

Client

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1- Promise stage
Stage One (c) for Murabaha financing
. Client submit the purchase requisition to the bank.

Bank
purchase requisition /Promise to the bank.

Client

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2-

Agency stage

2.

Client appointed as agent to

purchase goods on banks behalf

Bank Client

Agreement to Murabaha Agency Agreement

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2- Agency stage
Stage Two for Murabaha financing . Bank gives money to supplier through clients account for purchase of goods.
Islamic Bank Bank

Agreement to Murabaha

Client

Agency Agreement

Disbursement to the Supplier

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3. Acquiring Possession
Stage three for Murabaha financing . Client purchases goods on banks behalf and takes their possession.
Transfer of Risk

Vendor

Client purchases goods and takes possession

Bank

Client

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4. Execution of Murabaha
Stage four (a) for Murabaha financing
. Client makes an offer to purchase the goods from bank.

Bank

Client

Offer to purchase
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4. Execution of Murabaha
Stage four (b) for Murabaha financing
. Bank accepts the offer and

sale is concluded. Murabaha Agreement + Transfer of Title

Bank

Client

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4. Execution of Murabaha
Stage four (b) for Murabaha financing
. Client pays

agreed price to bank schedule.

according to an agreed (Bai Muajjal)

Usually on a deferred payment basis

Bank

Payment of Price

Client

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Murabaha
GENERAL MECHANICS
VENDOR ISLAMIC BANK
Agreement

CUSTOMER

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 deferred basis 25

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 A- CREDIT APPROVAL

(under Shariah perspective)

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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.

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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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STAGES OF MURABAHA

PRIOMISE STAGE B- Murabaha Facility Agreement

MOU

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Murabaha Facility Agreement MOU

Mentioning Limits of each facility Security to be submitted by the Customer Other terms and conditions covering all the facilities approved for the Customer. The Agreement to be signed by both the parties.
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Securities Against Murabaha Price

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STAGES OF MURABAHA

PRIOMISE STAGE C- Purchase Requisition

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C- Purchase Requisition

The Client orders the institution to buy certain goods for him and sell him the same after acquiring. Containing the details of the goods required to purchase from the Supplier, Cost Price and expected date of delivery The prerequisite is that the goods are not already owned by the client.
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STAGES OF MURABAHA

PRIOMISE STAGE D- Promise to Purchase

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D- Promise to Purchase
At this stage the customer promises the institution to buy the goods which were acquired by the institute on his request. Normally Purchase requisition contains this Promise.

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STAGES OF MURABAHA

PRIOMISE STAGE G- PAYMENT OF MURABAHA

Goods

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G- PAYMENT OF
MURABAHA Goods
Advance payment can be made to the supplier. It is advisable that Murabaha payment to be made directly to the supplier by the bank.

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STAGES OF MURABAHA

2-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.
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AGENCY STAGE
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.
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AGENCY STAGE

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

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STAGES OF MURABAHA

3-ACQUIRING POSSESION

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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.

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Acquisition Of Title & Possession of The Asset

2.Goods must exists at the time of execution of Murabaha.

If the above two are not fulfilled than the institution cannot execute Murabaha.

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Acquisition Of Title & Possession of The Asset

Documentary evidence required at the time of possession before execution of Murabaha i.e. delivery challan, gate passes and sales tax invoices.

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Physical Inspection
Importance of Physical Inspection.
It is advisable that bank should appoint one person for physical inspection .Importance of Physical Inspection

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STAGES OF MURABAHA

4- EXECUTION OF MURABAHA
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Actual Murabaha Sale

OFFER & ACCEPTANCE

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OFFER TO PURCHASE
The Customer will make an offer to purchase the goods acquired by him for Banks behalf mentioning the Offer Price .(Comprising Cost plus Banks Profit )

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BANKS ACCEPTANCE
The Bank will accept the offer made by the Customer. All the terms of the Murabaha Transaction such as Sale Price ( Cost plus Profit ) Due Date or Schedule of Payments etc. must be mentioned in the Banks Letter of Acceptance.
.

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RELATIONSHIP
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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ISSUES IN MURABAHA

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Rollover in Murabaha

Rescheduling is allowed but repricing is not allowed. Rollover is also not allowed.

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Risk Management IN MURABAHA

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Risk Dimensions
Banking Risks Islamic Banks also face -Additional asset risk -Greater fiduciary risks -Greater legal risk

Credit Liquidity Credit Credit Prising risk

Market
Foreign Exchange Solvency Operational
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END OF PRESENTATION

JAZAKAMUALLAH

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