Mudarah a Islamic finance product

1. MUDARABAHAH

2. OUTLINE
• Definition
• Conditions of Murabaha
• Basic features of Murabahah
• Shariah issues related to Murabahah
• The prohibited elements in Murabahah
• Types of Murabahah
• Mechanism of Murabahah
• Documentations

3. Murabaha
Its is a type of contract, which is considered as a
form of sale, where the seller expressly mentions
the cost of the sold commodity, and sells it to
another person by adding profit.
Murabahah financing and cost plus or mark up
price is one of the financing mechanisms in the
muamalat system

4. Murabahah
The word
murabahah is
derived from the
word ribh means
profit or gain.
If a person sells
a commodity for
a lump sum
price or
installment basis
without
reference to the
cost, this is not
murabahah
Even though he
is earning some
profit but it is not
bases on cost
plus profit so this
is called
musawamah

5. Definition
• Ibn al-Humams definition.
• “Al-Murabaha is a contract of delivery of traded goods by
a seller to the buyer by offering the buyer the selling cost
plus profit”

6. Conditions
• The subject matter of the product should be define clearly
even the quantity, type and description
• The act of concealing the cost price and the profit earned
murabaha transaction without customer knowledge will be
rendered and transaction will be null and void.
• The seller has obligation to supply the product to the
customer, and his obligation is to pay the amount
according to the agreed terms
• Both parties should be adult ,rational ,intelligent and can
be held accountable
• The contract is based on offer and acceptance

7. Conditions
• The buyer must know about the price at which the seller
obtained the object of sale,
• Knowledge of the profit margin
• The original price is fungible. The price at which the seller
obtained the goods must be measured by weight, volume
or number of homogenous goods.
• If the seller is not the owner the murabaha is not
permitted
• No riba trading should involve
• The traded item or property must be lawfully owned by the
seller according to shariah

8. Practical steps of Murabaha
The client and the
institution sign a
master agreement
whereby the
institution promises to
sell and the client
promises to buy the
commodities on an
agreed ratio of profit
added
When a specific
commodity is required
by the customer the
institution appoints
the client as his agent
for purchasing the
commodity on its
behalf, and an
agreement of agency
is signed by both
parties.
The client purchases
the commodity on
behalf of the
institution and takes
possession as an
agent of the institution

9. Practical steps of Murabaha
• The client informs the institution that he has purchased
the commodity on his behalf, and at the same time,
makes an offer to purchase it from the institution.
• The institution accepts the offer and the sale is concluded
whereby the ownership as well as the risk of the
commodity is transferred to the client
• The bank cannot enter into a actual sale at the time when
the client seeks murabahah financing from him

10. Shariah Issues
• Institutes offer financing by using LIBOR a bench mark to
calculate there profit or mark up. This has been pointed
out that this benchmark should be prohibited like interest
and profit should not be taken by using this.

11. Securities Against Murabaha
• Seller cannot ask for securities unless he has sold the
product to the client and the price is due.
Guaranteeing The Murabahah
• There is no compulsion of guarantee in Murabaha it is a
voluntary transaction and no fee can be charge on a
guarantee
• There client should agree that in case of defaults in
payments at the due date, he would pay a specified
amount to a charitable fund maintained by the bank.

12. Shariah Issues
• There is no concept of roll over in murabahah. The
transactions cannot be rolled over for a further period.
Rebate on Early payment
• Some scholars allow it, if a person want to pay early so he
can ask for discount. But many scholars don’t allow this.
Rescheduling of payment
• You can reschedule the payment but cannot charge more
money on it that is interest.

13. The prohibited elements in Murabahah
• It can not be used on all financing offered by conventional
banks. Some financial institutes are using murabahah for
financing overhead expenses, salary purposes and
others. But murabahah can not be used like this. It can
only be used only where a commodity is intended to be
purchased by the customer.
• Sometimes clients sign the murabahah documents just for
funds and write any product which they do not intend to
use. So financer should confirm that the client is getting
funds for the right purpose.

14. The prohibited elements in Murabahah
• Sale of commodity to the client is effected before the
commodity is acquired from the supplier. This is wrong
there should be documents in every stage of Murabahah
contract
• Entering into a murabahah contract on commodities
already purchased by their clients from a third part. It is
wrong. When the commodity is bought by the client it
cannot be purchased against from the same supplier

15. Types of Murabaha
Order and Promise
• If the purchaser accepts the request of the orderer , he
should purchase the asset and conclude a valid sale
contract between him and the vendor of the asset.
• The purchaser offers the asset to the ordered who should
accept it by virtue of the juristically binding mutual
promise and should accordingly establish a sale contract.

16. Types of Murabaha
Murabahah to the purchase orderer without an obligation
• In this type of murabaha one of the parties(the purchase
orderer) asks the other party (purchaser) to purchase an
asset and promises that when the latter purchases the
asset, the orderer would purchase it fro him at a price
including mark up profit thereon.

17. General rules regarding Murabahah to the
purchase ordered
The Guarantee
• The creditor (purchaser) may ask the debtor (purchase
orderer) to provide him with a guarantee. The debtor
should in this case submit an acceptable guarantee. The
ordered goods may be one of the acceptable guarantees
for payment of the debt.

18. Debts under Murabaha to the purchase
orderer
• According to Sharia rules, the settlement of debts under
murabahah to the purchase orderer should not be
connected to the disposition of the goods sold, whether
the result of the sale is negative and positive. This is
because when the sale is completed, the title is
transferred to the orderer and the original purchaser holds
title to the receivable.

19. Mechanism of Murabahah
Letter of edit based on Murabahah:
• In this application of murabahah, the customer requests
the bank to open a letter of credit to import goods from
abroad through an application enclosing a pro-forma
invoice and providing all the necessary details and
information.After securing the necessary gurantee and
scrutinising the application, the bank

20. Sale and purchase of goods
• Upon receipt of purchase of goods by the institution,
directly or through an agent, from the supplier the goods
shall be at the risk and cost of the institution until such
time that these goods are sold to the client, to be
evidenced by the acceptance, duly signed and endorsed
the institution.

21. Documentation
• Sale and purchase of goods
• Security
• Fees and expenses
• Payment of contract price
• Events of default
• Penalty
• Indemnities