Sale Contract /Murabaha . Muhammad Najeeb Khan

1. Sale Contract /Murabaha .Muhammad Najeeb Khan

2. CONTRACT IN ISLAM CONTRACT SUBJECT MATTER WORDING OF CONTRACT CONTRACTORS • Non-restricted • Sane • Mature • Present • Unconditional • Non-contingent • Specified • Quantified

3. 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

4. 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.

5. 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 ( Mabe’e) • Price ( Thaman ) • Possession or delivery ( Qabza )

6. CONTRACT ( Aqd ) • Offer & Acceptance ( Ijab-o-Qobool) • Oral ( Qauli ) • Implied ( hukmi ) • Buyer and seller ( Muta’aquadeen ) must be • Sane • Mature • Conditions of contract ( Sharaet-e-Aqd ) • sale must be non-contingent • sale must be immediate

7. SOLD GOOD OR SUBJECT MATTER ( Mube’e ) • Existing • Valuable • Usable • Capable of ownership/title • Capable of delivery/possession • Specific & Quantified • Seller must have title & risk

8. 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.

9. 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

10. 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. • BANKING MURABAHA

11. 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.

12. 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.

13. 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.

14. Step by Step Murabaha

15. 1- Promise stage Bank Client Facility approved Stage One (a) for Murabaha financing 1. Client approach the bank for facility through Murabaha.

16. 1- Promise stage Bank Client Murabaha Facility Agreement MOU Stage One (b) for Murabaha financing 1. Client and bank sign an agreement to enter into Murabaha.

17. 1- Promise stage Bank Client purchase requisition /Promise to the bank. Stage One (c) for Murabaha financing . Client submit the purchase requisition to the bank.

18. 2- Agency stage Bank Client Agency Agreement Agreement to Murabaha 2. Client appointed as agent to purchase goods on bank’s behalf

19. 2- Agency stage Bank Client Agency Agreement Agreement to Murabaha Disbursement to the Supplier Stage Two for Murabaha financing . Bank gives money to supplier through client’s account for purchase of goods. Islamic Bank

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

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

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

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

24. Transfer of Title Transfer of Title CUSTOMER VENDOR ISLAMIC BANK Payment of Purchase Price Payment of Marked-up Price Agreement Murabaha GENERAL MECHANICS • 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

26. STAGES OF MURABAHA PRIOMISE STAGE A- CREDIT APPROVAL (under Shariah perspective)

27. 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.

28. 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.

29. STAGES OF MURABAHA PRIOMISE STAGE B- Murabaha Facility Agreement MOU

30. Murabaha Facility AgreementMOU • 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.

31. Securities Against Murabaha Price

32. STAGES OF MURABAHA PRIOMISE STAGE C- Purchase Requisition

33. 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.

34. STAGES OF MURABAHA PRIOMISE STAGE D- Promise to Purchase

35. 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.

36. STAGES OF MURABAHA PRIOMISE STAGE G- PAYMENT OF MURABAHA Goods

37. 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.

38. STAGES OF MURABAHA 2-AGENCY STAGE

39. 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.

40. 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.

41. 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.

42. AGENCY STAGE If goods are acquired from third party the execution of agency agreement will be between the institution & the third party..

43. AGENCY STAGE TYPES OF AGENCY AGREEMENT • SPECIFIC AGENCY AGREEMENT When the purchase of commodity is not of consistent nature. • GLOBAL AGENCY AGREEMENT When the purchase of commodity is of consistent nature.

44. STAGES OF MURABAHA 3-ACQUIRING POSSESION

45. 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.

46. 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.

47. 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.

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

49. STAGES OF MURABAHA 4- EXECUTION OF MURABAHA

50. Actual Murabaha Sale OFFER & ACCEPTANCE