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Islamic Microfinance Murabaha By: Abdul Samad Al. Huda Centre of Islamic Banking & Economics (CIBE)
Presentation Outline n n n This module will highlight the following aspects of Murabaha Step by Step Murabaha Financing Documentation Profit Calculation Issues Conclusion
Murabaha - Definition /Introduction n In literary terms Ba’y Murabaha means “sale on profit” Murabaha is a particular kind of sale where the seller discloses the cost and profit charged thereon. The price in this sale can be both on spot and deferred
IMFI Murabaha n n The product of Murabaha that is being used in Islamic MFI 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 good/s through the institution.
IMFI Murabaha n n n It is a contract wherein the institution, upon request by the customer, purchases an asset from the third party usually a supplier/vendor and resells the same to the customer either against immediate payment or on a deferred payment basis. It is called Murabaha to the purchase order. It is a bunch of contracts completed in steps and ultimately meets the financial needs of the client.
Scope of Murabaha n n As it is a kind of sale, there must be a seller and buyer and something 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 need of the client. It is fixed price sale and normally is done for short term. The transaction can be used in order to meet the working capital requirement however it cannot be used to meet liquidity requirements.
Step by Step Murabaha Financing Client and IMFI sign an Agreement to enter into Murabaha (MMFA). IMFI Agreement to Murabaha Client
Step by step Murabaha Financing Client appointed as Agent to purchase goods on IMFI’s behalf. In this case, the concerned branch Manager will explain the appointment of client as an Agent, which will be checked by the Shariah Advisor. IMFI Agency Agreement Client
Step by step Murabaha Financing IMFI gives money to agent/supplier for purchase of goods. IMFI Client Agreement to Murabaha Agency Agreement Disbursement to the agent or supplier Supplier
Step by Step Murabaha Financing The agent takes possession of goods on IMFI’s behalf. Transfer of Risk IMFI Vendor Delivery of goods Agent
Step by Step Murabaha Financing Client makes an offer to purchase the goods from IMFI through a declaration. IMFI Client Offer to purchase
Step by step Murabaha Financing IMFI accepts the offer and sale is concluded. Murabaha Agreement + Transfer of Title IMFI Client
Step by step Murabaha Financing Client pays agreed price to IMFI according to an agreed schedule. Usually on a deferred payment basis (Bai Muajjal) IMFI Payment of Price Client
Steps in IMFI’s Murabaha MOU Order Form Agency Agreement Purchase Payment of Purchase Price Possession Offer and Acceptance (Declaration) Payment of Murabaha Price
Murabaha Documentations There a number of documents involved in a Murabaha financing transaction. The most essential of these documents are: n Master Murabaha Facility Agreement n Agency Agreement n Order Form n Description of assets n Declaration n Summary Payment Schedule
ISSUES RELATED TO MURABAHA
Issues Related To Murabaha Issue n n Filling/Signing of All Documents Simultaneously In certain transactions, the bank obtained the complete set of signed Murabaha transaction documents from the customer before actual execution of transaction. Solution n Shariah Compliance officer should physically check such irregularity leads to noncompliance of the transaction.
EVIDENCE OF PURCHASE Issue n n In certain transactions banks do not obtain sufficient/appropriate evidences of purchase and delivery of goods. Due to certain reasons the bank makes purchases in the name of the customer and the invoices and other title documents are in the name of the customer. Solution n The bank should perform some alternative procedures in order to conform the bonafides of the execution of transaction. e. g. To obtain Gate pass, Weighbridge slips Stock record etc. n It is recommended that in such cases of Murabaha, the bank should make payment directly to the suppliers and physical surveys of the goods should be performed on a test basis. Evidence of receipt of goods should also be obtained.
PHYSICAL VERIFICATION OF GOOD ISSUE Generally the bank takes the constructive possession, while the customer actually receives the delivery of the goods. There is risk that Murabaha transaction may be executed prior to the procurement of goods, which will render the Murabaha transaction as being mere financing rather than trading. Solution 1. 2. Keeping in view the issue physical surveys of the goods should be performed on a test basis. As an alternate, evidence of receipt of goods including third party evidence should be ensured.
DELAYED DECLARATIION Issue Solution In certain transactions banks receive declaration of the purchased goods after significant delay. So there is risk that goods might already have been used/sold by the customer. Murabaha transaction should be executed as soon the goods purchased by the customer.
ABSENCE OF DATES ON DECLARATION & INVISES Issue Solution Absence of date on invoices and declaration may arise a question with regard to the permissibility or otherwise of the Murabaha sate transaction. No invoices with out date shall be accepted and the management should remain vigilant to avoid such weaknesses.
DIFFRENCE IN QUANTITIES Issue Solution Difference in quantities of commodity being purchased under Murabaha as per Declaration and the invoices creates a conflict within Murabaha documentation. 1. 2. 3. The quantities as per “Declaration” should be similar to that of invoices presented unless a transaction involves joint purchases with customer. Where transaction involves joint purchases, the client must give a letter inducting clearly the amount purchased for himself. Purchases of shares are a good example of such case.
DISCOUNTS IN MURABAHA Issue It is a general practice, e. g. in Pharmaceutical industry that discounts are awarded to the suppliers at the end of the year. The bank generally do not claim any discounts in this regards at the end of the year. Solution The bank should ensure discounts (if any) available from supplier should be transferred to it.
REBATE Issue In certain cases the bank promises to gives rebate to the customer if the customer settles the transaction before the actual repayment date. Solution The bank should not agree to give rebate to the clients in the beginning of transaction and in every case of rebate, bank should refer to Shariah Advisor.
PRICING IN MURABAHA Issue In most of the cases of import Murabaha, the banks do not consider custom duty, LC charges etc in their pricing mechanism and the customer borne all these charges. Solution These charges related to the ownership of the asset and should be borne by the bank instead of the customer. The bank may add these charges in the cost of Murabaha asset.
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