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ISB540 - Chapter 8


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ISB540 - Chapter 8

  3. 3. DEFINITION  Literally:DEFINITION  From word al-ribh ( ) which means increase of profit  Technically EVIDENCE  Selling a commodity for its purchase price plus a specified mark-up or profit agreed upon PILLARS  Murabahah is a type of contract, a form of sale, where the sellerCONDITION expressly mentions the cost of the sold commodity he has incurred, and sells it to another person (the buyer) by addingAPPLICATION some profit or mark-up thereon.  Mechanism has to be conducted with complete sincerity/trust by the seller/financier by stating the cost price of the purchase and the total profit incurred clearly and truthfully. Hence, a sale based on trust (amanah). 3
  4. 4. EVIDENCES  Al-murabahah is a legitimate contract in Islam. Majority ofDEFINITION fuqaha comprising the sahabah (companion of the prophet), the tabien (followers of the sahabah) , and imam of the mazhab EVIDENCE considered al-Murabahah as a permissible contract based on rukhsah principle.  Al-Quran PILLARSCONDITIONAPPLICATION 4
  5. 5. EVIDENCE  HadithDEFINITION  Some scholars made murabahah analogous to a form of sale called Tawliyyah (sale at purchase price without making EVIDENCE profit)  It was reported that when Prophet (s.a.w) was preparing for PILLARS hijrah to Madinah, Abu Bakar bought 2 camels for the journey. The Prophet (s.a.w) said to Abu Bakar: Sell to me (at cost without profit) one of them. Abu Bakar said: It is yoursCONDITION for nothing. The Propehet (s.a.w) said: I would not take it for nothing.APPLICATION 5
  6. 6. PILLARS OF AL-MURABAHAH 1. SellerDEFINITION 2. Buyer 3. Merchandise or goods EVIDENCE 4. Price 5. Sighah: Offer (Ijab) and Acceptance (Qabul) PILLARSCONDITIONAPPLICATION 6
  7. 7. FLOWS OF AL-MURABAHAHDEFINITION Payment of purchase price Payment of purchase price + Premium EVIDENCE PILLARS Suppliers of Goods Islamic Bank CustomerCONDITIONAPPLICATION Sale of asset Sale of asset 7
  8. 8. CONDITIONS OF AL-MURABAHAH  5 important elements for condition of al-murabahah:DEFINITION 1. Product and selling price 2. Contracting parties EVIDENCE 3. Offer and acceptance 4. No riba trading shall be involved PILLARS 5. The initial contract must be validCONDITIONAPPLICATION 8
  9. 9. CONDITION OF AL-MURABAHAH 1. Product and selling priceDEFINITION  Product must be clearly defined including its type, quantity and other descriptions.  Selling price- its cost and profit must also be disclosed clearly EVIDENCE and truthfully.  Act of concealing cost price and/or margin of profit render transaction null and void. PILLARS 2. Contracting parties  Seller/ financier – responsible for supplying the product ordered by the buyer.CONDITION  Buyer/ customer – obligated to to pay for the product he purchased according to agreed terms of the agreement.APPLICATION  Both must be adults, rational, intelligent and can be held accountable. 3. Offer and acceptance  It shall contain the two important elements mentioned ie. Cost price and rate of profit.  The original price must be fungible ie. The price at which the seller obtained the goods must be measured by weight, volume or number of homogeneous goods. 9
  10. 10. CONDITION OF AL-MURABAHAH 4. No riba trading shall be involved.DEFINITION  Products traded cannot be paid by barter system from ribawi items prohibited by the Prophet (pbuh) ie. Gold for gold, EVIDENCE silver for silver, wheat for wheat, flour for flour, dates for dates and salt for salt and barley for barley unless weight, measurement and the calculations are equal. Also forbidden PILLARS eg. Selling 100kg of good flour at the price of 120kg of sub quality flour – constitutes riba.CONDITION 5. The initial contract must be valid.  The traded item or property must be lawfully owned by theAPPLICATION seller according to Shariah requirements. 10
  11. 11. CONDITIONS OF PROFIT  The amount of profit charged can be in several form:DEFINITION  Ratio : Charge RM100 for every RM1000  Percentage : Charge 15% profit from cost EVIDENCE  Fixed amount : Charge fixed amount of money  Minimum amount of profit recommended is the amount that can PILLARS sufficiently cover payment of business zakat (2.5%) and other expenses bear by the traderCONDITION  No limit to the amount of profit the traders can legitimately charge the customers since no evidence that specifies any amountAPPLICATION permitted for the traders to do so. 11
  12. 12. CONDITIONS OF PROFIT  Reason to the non-specification of amount of profit in trade:DEFINITION  Limitation of profit rate allowable is something against the rule of fair and justice  Differences between types of goods that have fast circulation in EVIDENCE nature compared to product that have rather slow circulation or slow demand; hence profit rate for the former should be PILLARS different from the latter  Differences between traders sell product in small quantity than those sell massive amount of productCONDITION  Differences between traders deal in cash compared to those that can accept credit or deferred paymentAPPLICATION  Differences between goods that considered necessity (dharuriyyah) compared to complementary (hajiyyah) and luxury (kamiliyyah) goods. Neccesity goods should be charge lower profit as it is needed item.  Differences between traders that easily acquire their product from those that can only acquired it through difficult process. Or traders that sell raw product compared to modified product. 12
  13. 13. APPLICATION  Islamic financial institutions aim to make use of bay al-DEFINITION Murabahah in circumstances where they will purchase raw materials, goods or equipment etc. and sell them to a client at EVIDENCE cost, plus a negotiated profit margin to be paid normally by installments.  This form of contract is widely used for import finance. So the PILLARS bank sells a commodity to the client for a predetermined amount or rate of profit over and above the total costs.CONDITION  In Islamic bank, Murabahah is applicable in import transactions in the form of Letter of Credit and for working capital financingAPPLICATION for purchase of stock and inventories, spare parts etc. 13
  14. 14. APPLICATION  Murabahah can be apply in 2 categories:DEFINITION  Ordinary Murabahah Sale  Involves 2 parties – seller and buyer. EVIDENCE  The seller is an ordinary trader who buys a commodity without depending on a prior promise of purchase, then PILLARS he displays it for murabahah sale for a price and a profit to be agreed upon.CONDITION  Murabahah based on Order and Promise  Widely applicable because used as one of financing toolsAPPLICATION by Islamic banks worldwide.  Murabahah to the purchase orderer (MPO) for a pre- agreed selling price, which includes a pre-agreed profit mark-up over its cost price, this having been specified in the customers promise to purchase. The payment is payable within a fixed future date in lump sum of by fixed installments 14
  15. 15. MURABAHAH WORKING CAPITALDEFINITION Islamic Bank EVIDENCE PILLARSCONDITIONAPPLICATION 1) Issue Purchase Order (PO) Suppliers Customer (acting as an of Goods agent of IB) 2) Supply Goods 15