Sale Contract / Murabaha

1. Center of Islamic Finance COMSATS Institute of Information Technology Lahore Campus Sale Contract /Murabaha Adopted from open source lecture of Mufti Najeeb Khan.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. Step by Step Murabaha

10. Bank Client Facility approved 1- Promise stage • Stage One (a) for Murabaha financing. • Client approach the bank for facility through Murabaha.

11. Bank Client Murabaha Facility Agreement MOU 1- Promise stage • Stage One (b) for Murabaha financing. • Client and bank sign an agreement to enter into Murabaha.

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

13. Bank Client Agency Agreement Agreement to Murabaha 2- Agency stage • Stage Two (a) for Murabaha financing. • Client appointed as agent to purchase goods on bank’s behalf

14. Bank Client Agency Agreement Agreement to Murabaha Disbursement to the Supplier 2- Agency stage • Stage Two (b) for Murabaha financing. • Bank gives money to supplier through client’s account for purchase of goods. Islamic Bank

15. Client purchases goods and takes possession Vendor Transfer of Risk Banck Client 3. Acquiring Possession • Stage three for Murabaha financing. • Client purchases goods on bank’s behalf and takes their possession.

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

17. Murabaha Agreement + Transfer of Title Bank Client 4. Execution of Murabaha • Stage four (b) for Murabaha financing. • Bank accepts the offer and sale is concluded.

18. Bank Client Payment of Price 4. Execution of Murabaha • Stage four (b) for Murabaha financing. • Client pays agreed price to bank according to an agreed schedule. Usually on a deferred payment basis (BaiMuajjal).

19. Transfer of Title Transfer of Title CUSTOMER VENDOR ISLAMIC BANK Payment of Purchase Price Payment of Purchase Price Agreement MurabahaGENERAL MECHANICS VENO

20. 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.

21. ISSUES IN MURABAHA • Rescheduling is allowed but repricing is not allowed. • Rollover is also not allowed.

22. Risk Management IN MURABAHA

23. Credit Liquidity Credit Prising risk Banking Risks Market Foreign Exchange Solvency Operational Risk Dimensions • Islamic Banks also face • Additional asset risk • Greater fiduciary risks • Greater legal risk

24. THANK YOU