Morabaha Financing

Essential of Islamic Finance
Islamic Mode of Financing
Morabaha
“Trade /Commodity Financing”
By Yousuf Ibnul Hassan
Iqra University
4/2/2014 1
Yousuf Ibnul Hasan
usufhasan@hotmail.com

The word Morabaha is taken from the Arabic
word Ribh.
Morabaha is a trade financing contract in
which a commodity is financed in
participation with the trader to be sold on
profit through the expertise, experience and
ability of the trader .
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In Morabaha Mode of financing the Party
bringing the funds to finance commodity
for the trade transaction is know as
Financier
And
The party that act as buyer and seller of the
commodities and goods that are financed
on the request is known as
MORAHIB
commonly known as TRADER
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In the Morabaha mode of financing funds
are not disburse to MORAHIB against
any collateral or other external security
arrangement but secure within the
transactional arrangement
Financier provide goods consist of
consumable or useable on the request
and specification of Morahib at a certain
pre-agreed price of sale by Financier
and agreed purchase price by Morahib.
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Morahib is a Trader
 Morabaha is a financing mode for trading
activities on the basis of sale on profit.
 Technically, it is a contract of sale in which
the seller declares his cost and profit.
 It is an ancient practice which was seen in
archives prior to the horizon of Islam.
 Morabaha practice developed in Islamic
financial system with guidance of Islamic
Shariah.
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Morabaha is a financing technique that
involves a request from Morahib a LPO
(Local Purchase Order) in favor of Financier
for the financing specific goods in which
Morahib deals and have experience.
Financier after appraising the LPO and its
requirement, adds its profit over to its cost
price on goods and sell to Morahib on the
condition under pre-agreed payment terms.
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Yousuf Ibnul Hasan

The Financier purchase through its
arrangement by employing its funds along with
the Margin (ARBOON) procure as per LPO
condition of specification and deliver these
goods after taking acceptance of receiving the
goods from Morahib through
GRN (Goods Receiving Note) which is duly
signed with remarks that: Goods requested
under LPO are received in satisfaction
to the requirement. .
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 In reality it is wise to settle all the terms in
pre-agreed as saying of Prophet Muhammad,
May Peace Be Upon Him.
“You must settle your terms in writing
and in agreeing prior to your trading
and in trust and for better
profitability.”
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How Morabaha mode of finance
operates
 Morahib needs goods and approaches financier to
get the required goods or commodities through
financing for commercial trading.
 In interest-based system, money is given on the
disposal of Applicant (Trader) on interest who
remain free to buy the required commodity from
the market or can use the fund for other purpose.
 This option is not available in Morabaha.
 Money cannot be given at the disposal of
Morahib.
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 Financing against the procurement of
goods or commodity is paid to supplier in
accordance to request of Morahib.
 Morahib approach Financier with his
request to acquire goods for trading
purpose .
 The request must be in writing with clear
specification of goods required along with
the supplier identification and price
declare by the supplier.
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 Morahib request for the goods must be
supported by the agreed equity (Arboon)
amount which is added to the financing to
pay the purchases of the goods requested.
 Financier using its expertise enter into
purchase deal with the supplier of goods and
negotiate the price to a minimum possible
level.
 Supplier Sale price and Morahib declared
price if differ then this difference is the part
of earning for Financier as efforts are
involve which to be compensated
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 Morahib cannot claim a part of Financier earning,
Financer as good gesture can reduce the profit.
 Morahib upon receiving the goods from supplier
issue an acceptance confirming the quality and
quantity of goods received from the supplier as well
as issue detail of stock kept at place.
 Financier can also appoint its Muqqadum (agent)
who is allowed to receive the delivery of goods and
commodities on behalf of Financier as SAFE
KEEPER or STOCKKEEPER
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 Muqqadum (agent) keeps the goods (stock) under
his control and release upon the delivery order
which is issued by Financier in favor of Morahib
either on the payment or under differ payment
terms.
 It is compulsory that goods transfer from
Financier to Morahib should be on the pre-agreed
price which must be integrated in the Morabaha
Financing Contract and mention in Purchase
Order which must be duly signed by Morahib..
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Morabaha transaction to be completed
in two stages.
 Firstly, the Morahib requests the Financier to
accept a Morabaha transaction and at the same
time promises to buy the commodity requested by
him on delivery.
 This promise is not a legal binding & Morahib may
go back on his promise
 Financier can hold the Arboon the equity of
Morahib and use it to cover the price margin to sell
the goods by reducing the price to attract the buyer.
 Financier is not legally bound to return any amount
to Modarib. However as gesture he can take any
decision that favor Morahib
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 Secondly, Morahib purchases the good acquired by the
Financier on a deferred payments basis and agrees to a
payment schedule on various dates.
 On such arrangements the profitability of Financier shall not
be change and pre-agreed price of resale of goods between the
two parties of Morabaha contract shall remain constant.
 Morabaha sale contracts allow the commodity sold it to the
Morahib or in case if these are refuses to purchased by Morahib
then Financier can sell buy at best suitable price taking the
advantage of Arboon.
 This prime clause of the contracts and it should be accepted by
Morahib.
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Two Type of Payment Terms
First is By-Salaam which means advance
against delivery of goods in future date.
Second is By Muajjal which is payment
under installment at future dates.
In both the terms price of the goods does not
rise but can be reduce on the discretion of
Financier or in case prices goes down.
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Yousuf Ibnul Hasan

Morabaha financing widely used by the Islamic banks
for various kinds of financing requirements.
 To provide finance in various and diverse sectors
 To consumer finance for purchase of consumer
durable such as cars and household appliances
 To real estate to provide housing finance
 To manufacturing sector for purchase of machinery,
equipment and raw material etc.
 To finance short-term trade for which it is eminently
suitable.
 To issue letters of credit.
 To finance import trade in today form of FIM (Finance
Imported merchandise)
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Imam Baghi
Transaction end on the purchase of CAMEL in CASH
by one and sell these CAMELS by other by adding
its profit then sell at a the higher price.
Such contracts end in two sales,
 Firstly, they are purchased in cash.
 Secondly, they are sold on credit.
.
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 Financier pays cash for commodity at the
request of Morahib then sells same to
Morahib on credit after adding its profit.
 In other words, financier by adding its
profit to original purchase price
 Morahib will have to pay even if the price
of the commodity falls as goods were
procured and provided on confirmation of
Morahib.
 In case Morahib fails to sell Financier sell
by itself using the margin of Morahib to
reduce the price.
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Imam Al Shafai
 If a man sees a commodity in the possession of
another and agrees to purchase the commodity with
the profit set by seller; such transaction is valid, as it is
not binding to any of the party of the contract till the
close of the transaction.
 If a man purchases the commodity and agree to pay
the profit, then sale is valid as the purchaser himself
agrees to offer the profit.
 If Morahib requests Financier to purchased separately
the goods on cash and then he shall buy in
installments at later stage. The cash based sales
accepted.
 Under second installation scenario sales would
become valid provided Morahib purchase on
installment or at cash at an agreed price of contract.4/2/2014 20
Yousuf Ibnul Hasan

Ibn Rashid
Morabaha sales are approved sales, but sales by mutual
consent are preferable.
“Sales by mutual consent are permitted
because Morabaha sales according to Imam
Ahmed require honesty and integrity on the
part of the seller”.
Temptations has the possibility of being led into
inaccuracy in one’s favor of sales which is agreed by
mutual consent.
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 In case seller cheats with price or capital, sale remains
valid, but buyer get entitlement to claim the difference
from the seller or drop the sale.
Some Fuqaha say that the buyer has no choice
but is entitled to deduct the difference.
 Morabaha sales are governed by the same conditions
applied to sales in general with most important aspect
that both buyers and sellers should know the amount
of the financing and the yield.
The seller must declare,
I bought for 100 and claim it for with a profit of
ten.
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Yousuf Ibnul Hasan

Selling in Installments of Differed Sales
 Time has to be agree on the price based on the period
of credit term.
 Morahib must agree to pay on maturity.
 If unable to fulfill financier has the right to claim the
goods by confiscating his Arboon which ultimately
covers the price including the compensation for the
loss of time.
 Morahib have to reveal quantity of stock in hand to
financier.
 Any discrepancy to original delivered quantity would
be paid by the Morahib.
 In case of failure to pay, Morahib can be legally
punished for misappropriation and theft.
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 Some Fuqaha forbid such types of sale, considering the
increase in price as Interest, a category of Riba. While
some of the Fuqaha permit such sales as it is based on
mutual agreement, and agree with Allah as said in
Holy Quran:
“Whereas Allah permitted trading and
forbidden usury and O’ ye who believe!
Misuse not yours wealth among your selves in
pride, except it be a trade by mutual consent”.
Financial institutions use Morabaha financing in both
ways,
 Differed sales of cost price for those who need the
commodity for their personal use and not for trade as
seen in Consumer Financing.
 On short term basis with limited installments provided
to those who cannot afford to pay in one go but with
an ability to pay in installments.4/2/2014 24
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Morabaha Cost-plus Financing
 This is a contract of sale between Financier and Morahib
at a price which includes a profit margin agreed by both
parties.
 As a financing technique, it involves the purchase of
goods by financier on requested by Morahib.
 Goods then sold to Morahib with a built-in profit.
 Repayment in installments are specified in the contract
as Morabaha Cost-Plus Financing.
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Selling in Installments of Differed Sales
 Differed sales or sales by installment could be
carried out on the basis of the cost price of
commodity.
 There is no disagreement on such type of sale and
could be carried out and allowed.
 Differed sale could be at a higher price than the
actual one of the commodity.
 Some Fuqaha disagree on that type of sale. But
most agree to such sales as seller informs the buyer
of cash price and price on deferred payment terms
as clear terms for two types of sales transaction.
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Yousuf Ibnul Hasan

Islamic jurists proposed
different forms of partnership
to provide credit & finance
facility for Agricultural,
Manufacturing and for trading
purposes.
These forms of Partnerships are as
follows:
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Muzara’a-Sharecropping
Muzara' a (sharecropping or crop partnership) is a contract
whereby landlord puts his agricultural land at farmer's disposal
to farm.
Farmer undertakes to give owner an amount of agricultural
products. This framework is based on a partnership between
capital and labor.
Musaqa-Tree-sharing
Musaqa (water partnership or tree-sharing) is a contract
whereby one person trim and water fruit trees own by other
person or are at his disposal, in exchange for an amount of
realize through the sale of the fruits on pre-agreed upon.
If a contract of Musaqa or tree sharing is related to fruitless
trees, like willows and sycophants, it is not valid.
However, it would be valid in such trees as henna whose leaves
are used or trees whose flowers are used.
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Morabaha Key Notes
 Financier is Financier & financing is made for
the procurement of goods and commodities.
 Morahib is the party of contract to sell the goods
that Financier financed under the contract.
 It is not capital base contract and funds are use
as financing for purchases of goods.
 Morahib has to prove and satisfy the Financier
of capabilities know-how of goods requested and
marketing and selling plans of the goods that are
financed.
4/2/2014 29
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Morabaha Financing

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