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Islamic Trade Finance
Murabaha:
The Bankers’ Perspective
Saleem Khan
Murabaha
• Islam prohibits charging fixed interest on money, but permits
charging fixed profit on sale of goods. This clears a common
misconception that charging fixed profit is haram.
• Islamic banks therefore use a sale-based transaction
(Murabaha) instead of a term loan for financing purchase of
assets by their clients, especially for working capital
requirements
• Over 60% of all business volume of Islamic banks comprises of
Murabaha transactions
Murabaha
• Murabaha is a particular kind of sale
• Where the transaction is done on a “cost plus profit” basis
i.e. the seller discloses the cost to the buyer and adds a
certain profit to it to arrive at the final selling price
• The distinguishing feature of Murabaha from ordinary sale is
- The seller discloses the cost to the buyer
- And a known profit is added
Murabaha
• Murabaha is simply a sale transaction
• Which is being used by Islamic Financial institutions as a mode
of financing by routing the transaction through Bai Muajjal.
Murabaha
• As per the rules of Shariah the seller cannot sell the goods
unless they come into his ownership.
• However, since goods are to be purchased from the market,
they need to be identified and purchased.
• The bank , being a 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
Bank therefore appoint him, in the first step of the transaction,
to identify and procure the goods on the bank’s behalf.
Murabaha
• Once the customer purchase the goods the risk of the goods
transfers to the Bank. Bank can now sell these goods to the
customer.
• Please note that the customer play two different roles in this
transaction. On that of Bank’s agent and other of purchaser.
These roles should be clearly segregated to make the
transaction halal.
• This process is explained in detail in next slides.
Murabaha
Step by step Murabaha financing
1. Client and bank sign an agreement to enter into Murabaha.
Bank
Agreement to
Murabaha
Client
Murabaha
Step by step Murabaha financing
2.
Client appointed as agent to purchase goods on bank’s behalf
Bank
Agreement to
Murabaha
Agency
Agreement
Client
Murabaha
Step by step Murabaha financing
3.
Bank gives money to client for purchase of goods.
Islamic Bank
Bank
Agreement to
Murabaha
Client
Agency
Agreement
Disbursement to the client
Murabaha
Step by step Murabaha financing
4. Client purchases goods on bank’s behalf and takes their
possession.
Transfer of Risk
Bank
Vendor
Client purchases
goods and takes
possession
Client
Murabaha
Step by step Murabaha financing
5. Client makes an offer to purchase the goods from bank.
Bank
Client
Offer to
purchase
Murabaha
Step by step Murabaha financing
6. Bank accepts the offer and sale is concluded.
Murabaha Agreement
+
Transfer of Title
Bank
Client
Murabaha
Step by step Murabaha financing
7.
Client pays agreed price to bank according to an agreed
schedule. Usually on a deferred payment basis (Bai
Muajjal)
Bank
Client
Payment of Price
Murabaha -Risks
In a conventional transaction the banks takes risk on the client,
however in a Murabaha
transaction the Bank takes the
following risks:
1. Asset Risk
•Since for a short period of time the risk of Asset is transferred
to the bank.
2. Credit Risk
•Since once money is receivable from the customer, the risk of
non-payment does exist
Murabaha -Mitigants
•
Assets Risk can be minimized by getting the asset insured
from a reputable insurance company.
• Credit Risk of the Murabaha transaction can be mitigated by
conventional credit-risk mitigation procedures.
Murabaha
Issues in Murabaha
 Rollover in Murabaha
•
Rollover in Murabaha is not possible since each Murabaha
transaction is for a particular asset. A new Murabaha can
only be executed for the purchase of a new asset.
Murabaha
Issues in Murabaha
 Rebate on early payments
• Prohibited by Meezan Bank’s Shariah Supervisory Board since
it make the Murabaha transaction similar to
debt.
conventional
Murabaha
Issues in Murabaha
• Can only be used for financing of assets, not operating
expenses.
• Asset should be clearly specified.
• Cannot be done for assets already purchased
• Murabaha is a package of different contracts
The sequence of their execution is
make the transaction halal.
extremely important to
Murabaha
Conclusion
• Murabaha transaction is the simplest from of an Islamic
Financial Transaction.
• Murabaha can be used to finance the purchase of any assets
which is recognized as Mal-e-Mutaqawam (Valuable) under
Shariah.
• A wide range of customer needs can be catered through
financing purchase of different assets by the customers.
Murabaha
Meezan Bank’s Experience
• Meezan Bank has been using Murabaha to finance purchase of
raw material by its clients.
• We have successfully entered into Murabaha transactions with
a number of clients. Some of them are:
Client
Transaction Volume
ICI
270
PSO
200
PARCO
100
Newage Cables
75
Sitara Chemicals
50
(Rs. in Millions)