This document discusses Murabaha, a type of Islamic financing used in banking. It has several key stages: 1) The customer promises to purchase an asset from the bank. 2) The bank appoints the customer as an agent to identify and acquire the asset. 3) The bank takes possession of the asset. 4) The bank sells the asset to the customer on a deferred payment basis at a pre-agreed price that includes costs and profit. The stages and requirements are designed to ensure the transaction complies with Shariah law.

1. MURABAHA
Rafey Ashraf Usmani

2. 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.

3. BANKING MURABAHA
•The product of Murabaha that is being used in
Islamic banking as a mode of finance is
something different from the Murabaha used in
normal trade .
•This transaction is concluded with a prior
promise to buy, submitted by a person interested
in acquiring goods through the institution.

4. 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.

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 sells
the same to the customer either against immediate
payment or on a deferred payment basis.

6. 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.
•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.

7. STAGES OF MURABAHA
•1. Promise Stage
•2. Agency Stage
•3. Acquiring Possession
•4. Execution of Murabaha
•5. After Execution of Murabaha

8. STAGES OF MURABAHA
PRIOMISE STAGE

9. 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 and should exclude any prior contractual
relationship between the customer and original supplier .
•It is not permissible to transfer a contract that has been executed
before between client and supplier. However revocation of prior
contract between the supplier and the client can allow the
institution to enter in Murabaha
•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.

10. CREDIT APPROVAL
(under Shariah perspective)
• Nature of the Business to be in scope of the
Murabaha. Nature of business should be Halal in order
to finance it through Murabaha.
• Differed payment not permissible in case of Gold,
Silver and Currencies.
• Cyclical nature of the business.

11. CONTINUED
•The Client orders the institution to buy certain goods
for him and sell him the same after acquiring. The
prerequisite is that the goods are not already owned by the
client.
•At this stage the customer promises the institution to buy
the goods which were acquired by the institute on his
request.

12. CONTINUED
• If the supplier is nominated by the client himself,
guarantee for good performance can be demanded.
• An advance payment (called Hamish jiddiyyah) may be
received from the customer as a form of security deposit.
• In case of breach of promise Hamish Jiddiyyah can be
used to recover actual damage however it cannot be used
for covering the Cost of Funds / Opportunity Cost.

13. STAGES OF MURABAHA
AGENCY STAGE

14. 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. 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. This is done by execution of
Agency Agreement between the institution and the customer.
However according to Shariah Perspective it is preferable to
appoint the Agent other then customer.
If goods are acquired from third party the execution of agency
agreement will be between the institution & the third party..

15. AGENCY STAGE
TYPES OF AGENCY AGREEMENT
1. SPECIFIC AGENCY AGREEMENT
When the purchase of commodity is not of
consistent nature.
2. GLOBAL AGENCY AGREEMENT
When the purchase of commodity is of
consistent nature.

16. STAGES OF MURABAHA
ACQUIRING POSSESION

17. ACQUIRING POSSESION
•Advance payment can be made to the supplier.
•Discount On Acquisition Of Assets
Discounts from supplier (If any) would be passed
on to the customer at the time of Murabaha Sale
by reducing the cost of sales.

18. ACQUIRING POSSESION
•If there is a rise in prices and the amount escalates
for which financing is availed than the transaction
can only be executed if the bank has been informed
and the bank subsequently accepts the same.
•The institution reserves the right to reject the
purchases if made other then agreed price.

19. ACQUIRING POSSESION
•Change of commodity in the agency agreement can
be done with mutual consent.
•Delay in Supply from the Supplier.
Delay in Supply from the supplier in case where
specific time was allowed leads to the revocation of
agency agreement. In such cases the customer will
refund the cost of goods.

20. ACQUIRING POSSESION
Rejection On Ground Of Quality
If the customer rejects the goods on ground of inferior
quality before the execution of Murabaha, new quality
can be acquired through new Murabaha.
After execution of Murabaha the bank will not be liable
for any discrepancies.

21. ACQUIRING POSSESION
• 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 obligatorythat the point when the risk of the
item is passed on by the institution to the
customer, be clearly identified.

22. ACQUIRING POSSESION
2.Goods must exists at the time of execution of
Murabaha.
• If the above two are not fulfilled than the institution
cannot execute Murabaha.
• Documentary evidence required at the time of
possession before execution of Murabaha i.e delivery
challan, gate passes and sales tax invoices.
• Murabaha payment to be made directly to the supplier
by the bank.

23. ACQUIRING POSSESION
•Importance of Physical Inspection
•Registration is in the name of institution for those
items where registration is required.

24. STAGES OF MURABAHA
EXECUTION OF MURABAHA

25. EXECUTION OF MURABAHA
•Customer, as an Agent, confirms that goods have been
purchased & same are in his possession and that payment
has been made to the supplier.
•Customer makes an offer to purchase the goods from the
institution.
•Institution accepts the offer by stating the Cost price plus
amount of Profit and the due date for Payment by which
sale is concluded.
• At this stage relation of a buyer & seller comes into operation
between the institution & the client, & since the sale is effected
on deferred payment basis, the relation of debtor and creditor
also emerges between them simultaneously.

26. EXECUTION OF MURABAHA
• Customer having received delivery of Goods as per
Purchase Requisition confirms that goods have been
examined and are satisfactory in respect of quality and
suitability for his use. The customer also releases the
institution from any liability in respect of the goods in
any manner

27. AFTER EXECUTION OF
MURABAHA
Securities Against Murabaha Price
• The institution may ask the customer to furnish a security to its
satisfaction for prompt payment of the deferred price.
• However, it is also permissible that the customer furnishes a
security at earlier stages but after the Murabaha price is
determined.
• It is also permissible that the sole commodity itself is given to
the seller as a security.
• It is not allowed to take Interest bearing instruments as
securities.

28. AFTER EXECUTION OF
MURABAHA
CASE OF DEFAULT
• In the case of default by the buyer in the payment of price at the
due date, the price cannot be increased.
• However if he has undertaken, in the agreement to pay certain
amount for a charitable purpose, he shall be liable to pay the
amount undertaken by him.
• But this recovered amount from the buyer will not be considered
penalty nor compensation, therefore it will not account to
institutions income.
• Institution is bound to spend it for a charitable purpose on
behalf of the buyer.

29. ISSUES IN MURABAHA
Rebate in Early Payment
•If a customer makes early payment and there is no commitment
from the seller in respect of any discount in the price of
Murabaha, the seller has the sole discretion to grant him some
rebate.
•It is prohibited by Shariah Standards to give Rebate to the client
on early payment as under Murabaha the price is fixed.
Rollover in Murabaha
•Rescheduling is allowed but repricing is not allowed.
•Rollover is also not allowed.

30. ISSUES IN MURABAHA
Buy Back
• Under Murabaha Financing once the goods
purchased by the client from the Bank the same
goods cannot be Pledged/ Hypothecated for
raising finance facility from the Islamic Bank.