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  3. 3. DEFINITION  Literally: DEFINITION  From word al-ribh ( ) which means increase in capital or profit of trading EVIDENCES  Technically  Sale in which the mark up is disclosed to the purchaser as per PILLARS the seller’s purchase price for a trust-sale for a certain specific asset.  Murabahah is a type of contract, a form of sale, where CONDITION the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another ISSUES person (the buyer) by adding some profit or mark-up thereon.APPLICATIONS  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. DEFINITION  Majority of fuqaha comprising the sahabah EVIDENCES (companion of the prophet), the tabien (followers of the sahabah) , and imam of the mazhab considered PILLARS al-Murabahah as a permissible contract based on rukhsah principle. CONDITION  Al-Quran ISSUESAPPLICATIONS 4
  5. 5. EVIDENCES  Hadith DEFINITION  Some scholars made murabahah analogous to a form of sale called Tawliyyah (sale at purchase price without EVIDENCES making profit)  It was reported that when Prophet (s.a.w) was PILLARS preparing for hijrah to Madinah, Abu Bakar bought 2 camels for the journey. The Prophet (s.a.w) said to Abu CONDITION Bakar: Sell to me (at cost without profit) one of them. Abu Bakar said: It is yours for nothing. The Prophet ISSUES (s.a.w) said: I would not take it without price.APPLICATIONS 5
  6. 6. PILLARS OF AL-MURABAHAH 1. Seller DEFINITION 2. Buyer EVIDENCES 3. Merchandise or goods 4. Price PILLARS 5. Sighah: Offer (Ijab) and Acceptance (Qabul) CONDITION ISSUESAPPLICATIONS 6
  7. 7. FLOWS OF AL-MURABAHAH DEFINITION Payment of purchase price Payment of purchase price + Premium EVIDENCES PILLARS Suppliers of Goods Islamic Bank Customer CONDITION ISSUES Sale of asset Sale of assetAPPLICATIONS 7
  8. 8. CONDITIONS OF AL-MURABAHAH  5 important elements for condition of al- DEFINITION murabahah: EVIDENCES 1. Product and selling price 2. Contracting parties PILLARS 3. Offer and acceptance 4. No riba trading shall be involved CONDITION 5. The initial contract must be valid ISSUESAPPLICATIONS 8
  9. 9. CONDITION OF AL-MURABAHAH 1. Product and selling price DEFINITION  Product must be clearly defined including its type, quantity and other descriptions. EVIDENCES  Selling price- its cost and profit must also be disclosed clearly and truthfully. PILLARS  Act of concealing cost price and/or margin of profit render transaction null and void. CONDITION 2. Contracting parties  Seller/ financier – responsible for supplying the product ISSUES ordered by the buyer.  Buyer/ customer – obligated to pay for the product heAPPLICATIONS purchased according to agreed terms of the agreement.  Both must be adults, rational, intelligent and can be held accountable. 9
  10. 10. CONDITION OF AL-MURABAHAH 3. Offer and acceptance DEFINITION  It shall contain the two important elements mentioned i.e.. Cost price and rate of profit.  The original price must be fungible i.e.. The price at which the EVIDENCES seller obtained the goods must be measured by weight, volume or number of homogeneous goods. PILLARS 4. No riba trading shall be involved.  Products traded cannot be paid by barter system from ribawi items prohibited by the Prophet (s.a.w) CONDITION  i.e.. Gold for gold, 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. ISSUES  Also forbidden egg. Selling 100kg of good flour at the price of 120kg of sub quality flour – constitutes riba.APPLICATIONS 5. The initial contract must be valid.  The traded item or property must be lawfully owned by the seller according to Shariah requirements. 10
  11. 11. CONDITIONS OF PROFIT  The amount of profit charged can be in several DEFINITION form: 1. Ratio : Charge RM100 for every RM1000 EVIDENCES 2. Percentage : Charge 15% profit from cost PILLARS 3. Fixed amount : Charge fixed amount of money  Minimum amount of profit recommended is the CONDITION amount that can sufficiently cover payment of business zakat (2.5%) and other expenses bear by ISSUES the trader  No limit to the amount of profit the traders canAPPLICATIONS legitimately charge the customers since no evidence that specifies any amount permitted for the traders to do so. 11
  12. 12. NON-SPECIFICATION OF PROFIT RATE IN TRADE  Reason to the non-specification of amount of profit in trade: DEFINITION 1. Limitation of profit rate allowable is something against the rule of fair and justice 2. Differences between types of goods that have fast circulation in EVIDENCES 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 3. Differences between traders sell product in small quantity than those sell massive amount of product CONDITION 4. Differences between traders deal in cash compared to those that can accept credit or deferred payment ISSUES 5. Differences between goods that considered necessity (dharuriyyah) compared to complementary (hajiyyah) and luxury (kamiliyyah) goods. Necessity goods should be chargeAPPLICATIONS lower profit as it is needed item. 6. 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. ISSUES IN MURABAHAH CONTRACT  Murabahah is trust based contract and everything DEFINITION should be disclosed including cost price and mode of payment. There are several issues related to murabahah: EVIDENCES 1. Rebate in the event of default  Issues is whether the bank must give rebate to the customer PILLARS in case of default or to give early settlement or not. 2. Disclosure of cost price CONDITION  The seller obliged to disclose the actual cost; if the exact cost cannot be ascertained or unknown, it is impossible to have ISSUES murabahah contract 3. Use of the interest rate as a benchmarkAPPLICATIONS  Many IFI do murabahah financing to determine profit ot mark up on the basis of current interest rate using conventional interest rate benchmark or rating 13
  14. 14. APPLICATION  Islamic financial institutions aim to make use of bay DEFINITION al-Murabahah in circumstances where they will purchase raw materials, goods or equipment etc. EVIDENCES and sell them to a client at cost, plus a negotiated PILLARS profit margin to be paid normally by installments.  Among others applications of contract of CONDITION murabahah in Islamic banking are:  Murabahah financing ISSUES  Bank’s treasury product through murabahah commodityAPPLICATIONS  Issuance of sukuk murabahah  International trade financing 14
  15. 15. MODERN APPLICATION  Tri-partied Murabahah DEFINITION  Based on Murabahah lil-amir bisshira (Murabahah to the purchase order) concept. EVIDENCES  Widely applicable because used as one of financing tools by Islamic banks worldwide. PILLARS  Murabahah to the purchase orderer (MPO) for a pre- agreed selling price, which includes a pre-agreed profit CONDITION mark-up over its cost price, this having been specified in the customers promise to purchase. The payment is ISSUES payable within a fixed future date in lump sum of by fixed installmentsAPPLICATIONS  It is one of the usual practicalities adopted by the Islamic banks in Malaysia for assets like car, house and etc. 15
  17. 17. MODERN APPLICATION  Sukuk Murabahah DEFINITION  Sukuk defined as trust certificate or participation securities which grant the investor a share of an asset EVIDENCES along with the cash flows and risk commensurate with such ownership. PILLARS  Sukuk holder are entitled to shared in the revenues generated by the sukuk assets and proceeds of the CONDITION realization of the sukuk assets. ISSUESAPPLICATIONS 17
  18. 18. SUKUK MURABAHAH Sell 3 DEFINITION Sell 1 EVIDENCES Investor Murabahah Sukuk SPV 4 PILLARS Primary Subscriber Sukuk Issuer 5 Proceed Payment CONDITION ISSUES Sell 2 6 Murabahah SukukAPPLICATIONS Company In Need of Secondary Market Capital 18