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 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,
their Cost and expected date of delivery.

- The prerequisite is that the goods are not already owned

by the Customer. They should always be bought from a
third party.
 PERSONAL GUARANTEE

- If the supplier is nominated by the Customer

himself, guarantee for good performance can be
demanded.
 HAMISH JIDDIYYAH
- An advance payment (called Hamish Jiddiyyah)
may be received from the customer as a form of
security deposit

- In case of breach of promise, Hamish Jiddiyyah

can be used to recover actual damages. However it
cannot be used for recovering the Cost of Funds /
Opportunity Cost.
 DISCOUNT ON ACQUISITION OF ASSETS

- 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.
- Similarly, in case of Suppliers’ Credit, the term
of credit must be identical or longer.
 CHANGE OF COMMODITY

- Change of commodity(ies) specified in the

agency agreement can be done with mutual
consent.
 INCREASE IN PRICES
- If there is an increase in prices and the cost
escalates, then the transaction can only be
executed if the bank has been informed and
accepts such increase.
- The Bank reserves the right to reject the
purchases if made at other than agreed price.
 DELAY IN SUPPLY FROM THE SUPPLIER

- Delay in Supply from the supplier, in case where

specific time was allowed, leads to the
revocation of the contract of Purchase and(in
some cases) the Agency Agreement. In such
cases the customer will refund the cost of goods.
ACQUISITION OF TITLE & POSSESSION OF
THE ASSETS
- 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.

- The Commodity must move from the responsibility of the

supplier to the responsibility of the Bank.

- 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, are clearly identified.
ACQUISITION OF TITLE & POSSESSION OF
THE ASSETS
- Goods must exists at the time of execution of
Murabaha.

-If the above two requirements are not fulfilled, then the
Bank cannot execute Murabaha

- Documentary evidence, e.g., delivery Challan, gate

passes and sales tax invoices must be obtained at the
time of acquisition of Goods before execution of
Murabaha.
 CASE OF DEFAULT
- In the case of default by the Customer in the payment of price on
the due date, the price cannot be increased.

- However, if Customer has undertaken in the agreement to pay

certain amount for a charitable purpose, then Customer shall be
liable to pay this amount to a Charity Account separately maintained
by the Bank.

- This amount will neither be considered penalty nor compensation

and it will not form a part of Bank’s income.

- Bank is bound to spend it for a charitable purpose on behalf of the

Customer.
 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, 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. So it is recommended that issue should
be brought to the knowledge of Shariah Advisor.
 ROLLOVER IN MURABAHA

- Rescheduling is allowed but re-pricing is not allowed

- Rollover is also not allowed.

 BUY BACK

- Under Murabaha Financing, once the goods have been

purchased by the Customer, 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.
 Agency Agreement

Through this agreement, the Bank appoints the customer as

its agent to select and procure specified goods for the Bank.

This agreement needs to be signed once between the

Customer and the bank to cover the specified agency period.
The disbursement of funds is made under this agreement.

The customer should provide a comprehensive list of assets

and commodities that he may procure during the course of
business from time to time.
 Order Form

This document is executed at the time of each sub-

Murabaha request, i.e., each time when the customer
requires Murabaha for purchase of assets.

Through this document, 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.

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.
 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.

This document establishes the actual sale transaction, i.e. transfer of

ownership of goods from the Bank to the Customer

At this stage the specific details of the assets must be known i.e.
quantity, quality, cost etc.

continued………….
Purchase evidence in the form of bills, sale invoice, sales tax invoice,
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,
transportation and handling etc.

Proper timing of declaration is extremely important especially in

cases of perishable or immediately consumable commodities.

Murabaha Price (Cost of Goods + Profit) should be determined at

this stage and stated clearly in the Declaration.
 Payment Schedule

The Payment Schedule specifies the amount that Customer will pay
from time to time or in lump sum, towards the settlement of
Murabaha Price.

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.
 PRACTICAL ISSUES IN MURABAHA

1. Subject Matter
2. Timing of Offer & Acceptance
3. Purchase Evidence
4. Direct Payment
5. Profit Recognition
6. Penalty on Late Payment
7. Rebate on Early Payment
8. Rollover in Murabaha
9. Training of Customer & Bank Staff
10. Process of Murabaha may differ from Product to Product
 Subject matter of Murabaha

Goods must exist at the time of execution of Murabaha

Murabaha cannot be done in all commodities e.g., Currencies,

Gold, Silver.

Murabaha cannot be used for paying utility bills, wages, overhead

expenses etc.

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, the sequence and
timing of which is extremely important.

Through the Declaration which contains Offer & Acceptance, the

Customer and the bank complete an important step of a valid
Murabaha Sale.

This is to be signed by the customer when he has purchased and

taken possession of the goods as the Bank’s Agent.

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.
 Purchase Evidence
In order to ensure that the customer actually purchased the assets as
claimed, the customer is required to submit asset purchase evidence along
with “Offer & Acceptance”.

The purchase evidence must confirm that the asset was purchased after the
“Agency Agreement”

Purchase evidence may be in the form of invoice, delivery orders, truck

receipts etc.

In some cases, however, it may be too burdensome for the Customer to

submit all the invoices as the number of invoices may run into hundreds.

For example, cotton purchases are generally in small quantities from various
sources and hence for each Sub-Murabaha there may be too many invoices
to submit. It is suggested to furnish considerable sample of invoices along
with summary of all purchases.
 Penalty on Late Payment

As soon as the Murabaha is executed, the Murabaha Price

becomes a receivable for the Bank. Hence, any amount charged
over and above the “Agreed Amount” will be RIBA.

However, 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.
 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, then the Bank has the sole discretion in allowing the
rebate.

It is not recommended to make it a practice and must be avoided

in normal course of business. Such issue should be brought to the
knowledge of Shariah Advisor.
 Rollover in Murabaha

Rollover in Murabaha is not allowed since each Murabaha

transaction is for the purchase of a particular asset. 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.
 RISK DIMENSIONS

Credit

Liquidity

Pricing

Banking Risks Competition

Foreign Exchange

Solvency

Operational
IJARAH
 Definition and Basic Conditions

Transferring of usufruct (body) of an asset to another person for an

agreed period, at an agreed consideration.

The Asset should be a thing of value, identified and quantified.

Anything which cannot be used without consuming cannot be

leased out, e.g., Money, Wheat etc.
 Difference between Ijarah &
Conventional Lease
Two contacts into one contract is not permissible in Shariah. Therefore, 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.

 The rental decided at the time of the agreement cannot fluctuate except
in the manner agreed between the Parties.

 Expenses under Ijarah are as follows:

Lessor – expenses relating to the corpus of the asset i.e. Insurance,

Accidental Repairs etc. will be borne by the Lessor

Continued…………….
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.

In case, the insurance claim is rejected, the loss will be borne by
the Lessor (Bank) and not the Lessee.

 In case the asset is not working or breaks down, the Lessor

cannot charge rent for that period unless the Lessee is found
guilty of misuse of the assets, negligence or of willful misconduct
 Difference between Ijarah & Murabaha
In Murabaha once the sale is completed, the entire risk is shifted to the
purchaser, 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,
he is not required to inform the bank that he has taken possession as is
the case in Murabaha. Once he has taken possession, the rent will start
immediately.
Murabaha attributed to a future date is invalid in Shariah, but Lease can
be attributed to a future date.
A Murabaha cannot be attributed to a future date as in this case, 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. But in Leasing it is permissible, because
in leasing the asset remains under the risk and ownership of the Lessor
throughout the leasing period.
 Pricing Criteria in Islamic Banking

Some instruments for handling the Price Risk:-

1. No long term Murabaha

2. Adjustment in subsequent deals
3. Floating rate in Ijarah
4. Tiered profit in Musharakah / Mudarabah
5. Capping of profit in Musharakah / Mudarabah
6. Reviewing of profit ratios in Musharakah / Mudarabah
7. Voluntarily withdrawal from any amount due by any of the
8. parties
 BASIC RULES OF IJARA
The rental must be determined at the time of contract for the
whole period of lease.

It is permissible that different amounts of rent are fixed for

different periods during lease tenor, 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.

The determination of rental on the basis of the aggregate cost

incurred in the purchase of the asset by the Lessor, as is normally
done in financial lease, is not against the rules of Shariah.

Tenure of Lease agreement must be fixed & specified in clear

terms Continued……………
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.

Purchase date and respective purchase price must be mentioned clearly

in the undertaking to purchase.

Insurance cost incurred by the bank must be recovered in the lease

rentals.

In case the customer is acting as an agent of the bank for Insurance, the
customer will pay the insurance premium but this cost will be
reimbursed to the Customer by the bank.
 IJARA AS A MODE OF FINANCING

The commencement of lease

Unlike the contract of sale, the agreement of Ijarah can be
effected for a future date. Hence, it is different from
Murabaha.

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.
Continued……………
Expenses consequent to ownership to the Lessor
As the Lessor is the owner of the asset, he is liable to pay all the
expenses incurred in the process of its purchase and its import to the
country of the Lessor, for example freight and customs duty etc.

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.g., 5%) after a specified period
(e.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.
Continued……………
Charity for late payment of Rent
The Lessor cannot charge an additional amount in case the Lessee delays
payment of rent. He can, however, recover an amount to be spent for charity.

The residual value of the leased Asset

Even after the expiry of the lease period, 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.

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.

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.

Continued……………
Termination of lease
If the Lessee contravenes any term of the agreement the Lessor has a right to
terminate the lease contract unilaterally. If not, then it can be terminated
through mutual consent only. However, in such a case he cannot charge rentals
for the remaining period.

Takaful/Insurance of the Asset

If the leased property is insured, whether under the Islamic mode of Takaful or
conventional insurance, it should be at the expense of the Lessor and not at the
expense of the Lessee.

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, subject to payment of all rentals as agreed. The
validity of this arrangement is subject to two basic conditions:
Firstly, the agreement of Ijarah, itself should not be subjected to the signing of
this promise of sale or gift.
Secondly the promise should be unilateral and binding on the Promisor only.
Continued……………
Sub-Lease

If the leased asset is used differently by different users, the Lessee cannot sub-
lease the leased asset except with the express permission of the Lessor.

Sale and leaseback transaction

Sale Agreement must be executed before entering into Lease Agreement. 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, even on
the occurrence of an event of default.
 PRACTICAL ISSUES
Expenses such as Import duties, taxes etc are not added to the Cost
of the Asset.

Where Customer himself / herself arranges Insurance:-

- No Insurance Agency agreement is executed with the
Customer
- Insurance Expense is not reimbursed to the Customer

In case of loss / damage, the insurance claim received is shared

with the Customer although the Customer has no right to claim
such benefit.

At the time of maturity or early termination of Lease Agreement, a

Sale Deed is not executed to effect transfer of ownership.
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, the Bank makes payment to the foreign

supplier

The Ijarah Agreement with the Customer becomes effective.

A specified rental will be agreed at this point in time. However, rental

would be charged once the asset becomes workable/usable by the Lessee
or is delivered to him.

After the term of Ijarah Agreement is completed, the bank may sell the
asset to the importer at an agreed price.
IJARAH FINANCING FOR ASSETS IMPORTED
VIA
USANCE LC
 IMPORT IJARAH

After necessary approvals, FBL and the Customer enter into an

Ijarah Agency Agreement listing the assets to be imported.

Under Ijarah Agency, FBL appoints the customer as its agent to

import the asset and pay relevant duties, taxes, transportation, and
other charges to port authorities for securing the release of the
asset.

All such payments made by Importer shall be reimbursed by Bank

and will constitute a part of the total cost of the asset.

The customer takes delivery of the asset as bank’s agent and pays
the applicable duties and taxes etc.
 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.

• After installation of asset, Ijarah Agreement between the

Bank and the Customer becomes effective and the lease
rentals start in the manner agreed .