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Murabaha to the Purchase
Orderer.PRESENTED BY
MOHAMMAD MOHSIN AHMED
at
AlHuda CIBE Workshop at Avari
Hotel
Karachi
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MURABAHA
Murabaha is a particular
kind of sale where the seller
discloses its cost and profitcharged thereon.
The price in this sale can beboth on spot and deferred.
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BANKING MURABAHA
The product of Murabaha that is being
used in Islamic banking as a mode of
finance is something different from theMurabaha 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.
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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 ofthe client.
The sequence of their execution is extremely
important to make the transaction Shariahcompliant.
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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 resells the same to
the customer either against immediate
payment or on a deferred payment basis.
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SCOPE OF MURABAHA
As it is a kind of sale, there mustbe a seller and buyer and some thingthat is bought and sold . The
institution is the seller and the clientis buyer.
It cannot be used as a substitute for
running finance facility , whichprovides cash for fulfilling variousneeds of the client.
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SCOPE OF MURABAHA
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.
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STAGES OF MURABAHA
1. Promise Stage
2. Agency Stage
3. Acquiring Possession
4. Execution of Murabaha
5. After Execution of Murabaha
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STAGES OF MURABAHA
PRIOMISE STAGE
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CREDIT APPROVAL (under
Shariah perspective)
Points to Be Considered WhileApproving Credit
It is essential that the transaction betweentwo parties must be genuine , not fictitious
and should exclude any prior contractualrelationship between the customer andoriginal supplier .
It is not permissible to transfer a contract
that has been executed before between clientand supplier. However revocation of priorcontract between the supplier and the clientcan allow the institution to enter in Murabaha
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CREDIT APPROVAL (under
Shariah perspective)
Points to Be ConsideredWhile Approving Credit
The Institution must insure thatthe party from whom the item isbought is a third party and not thecustomer or his agent . In this
manner the transaction can besaved from Bai Inah (Buy Back)which is not allowed in sharia.
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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
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CREDIT APPROVAL (under
Shariah perspective)
SPECIFIED Commodities study in
respect of
Uniqueness
Pricing
Active Market
Risk Profile
Cash Flow Analysis
Commitment Fee not permissible.
After these consideration limit may
be approved
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CONTINUED
The Client orders the institution tobuy certain goods for him and sellhim the same after acquiring. The
prerequisite is that the goods are not
already owned by the client.At this stage the customer promisesthe institution to buy the goods
which were acquired by the institute
on his request.
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CONTINUED If the supplier is nominated by the
client himself, guarantee for goodperformance can be demanded.
An advance payment (calledHamish jiddiyyah) may be receivedfrom the customer as a form ofsecurity deposit.
In case of breach of promiseHamish Jiddiyyah can be used torecover actual damage however it
cannot be used for covering theCost of Funds / Opportunity Cost.
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STAGES OF MURABAHA
AGENCY STAGE
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AGENCY STAGE
Agency Agreement is not thecondition of the Murabaha if theinstitution can make direct
purchases from the supplier.
The financial institution, does not
have the expertise to identify thegoods and negotiate an efficientprice.
The customer, however, being in
the industry, can do this. The institution therefore appointshim as its Agent (which is also
permissible), in the first step of thetransaction, to identify and procure
the goods on institution behalf.
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AGENCY STAGE
This is done by execution of AgencyAgreement between the institution andthe customer.
However according to ShariaPerspective it is preferable to appointthe Agent other then customer.
If goods are acquired from third partythe execution of agency agreement will
be between the institution & the thirdparty.
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AGENCY STAGE
TYPES OF AGENCY AGREEMENT
1. GLOBAL AGENCY AGREEMENT
When the purchase of commodity is
not of consistent nature.
2. SPECIFIC AGENCY AGREEMENTWhen the purchase of commodity is of
consistent nature.
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STAGES OF MURABAHA
ACQUIRING POSSESION
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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.
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ACQUIRING POSSESION
If there is a rise in prices and the
amount escalates for which financing
is availed than the transaction canonly 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.
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ACQUIRING POSSESION
Change of commodity in the agencyagreement 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 thecost of goods.
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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 throughnew Murabaha.
After execution of Murabaha the bank will not
be liable for any discrepancies.
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ACQUIRING POSSESION
Acquisition Of Title & PossessionOf The Asset
1. Institution must take actual or constructivepossession of the item .
The forms of taking delivery or possession of itemsdiffer according to their nature and customs.
The item must move from the responsibility of thesupplier to the responsibility of the institution .
It is obligatory that the point when the risk of theitem is passed on by the institution to thecustomer, be clearly identified.
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ACQUIRING POSSESION
2.Goods must exists at the time of execution ofMurabaha.
If the above two are not fulfilled than theinstitution cannot execute Murabaha.
Documentary evidence required at the timeof possession before execution of Murabahai.e delivery challan, gate passes and sales taxinvoices.
Murabaha payment to be made directly to thesupplier by the bank.
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ACQUIRING POSSESION
Importance of Physical Inspection
Registration is in the name ofinstitution for those items where
registration is required.
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STAGES OF MURABAHA
EXECUTION OF
MURABAHA
C O O A A A
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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 intooperation between the institution & the client, & sincethe sale is effected on deferred payment basis, the relationof debtor and creditor also emerges between themsimultaneously.
EXECUTION OF MURABAHA
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EXECUTION OF MURABAHA
Customer having received delivery of Goodsas per Purchase Requisition confirms thatgoods have been examined and are
satisfactory in respect of quality andsuitability for his use.
The customer also releases the institutionfrom any liability in respect of the goods in
any manner
AFTER EXECUTION OF
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AFTER EXECUTION OF
MURABAHA
Securities Against Murabaha PriceThe institution may ask the customer to
furnish a security to its satisfaction for promptpayment of the deferred price.
However, it is also permissible that thecustomer furnishes a security at earlier stagesbut 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 preferable not to take Interest bearing
instruments as securities.
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AFTER EXECUTION OF
MURABAHA
CASE OF DEFAULT
In the case of default by the buyer in the payment ofprice at the due date, the price cannot be increased.
However if he has undertaken, in the agreement topay certain amount for a charitable purpose, he shallbe liable to pay the amount undertaken by him.
But this recovered amount from the buyer will not beconsidered penalty nor compensation, therefore it willnot account to institutions income.
Institution is bound to spend it for a charitablepurpose on behalf of the buyer.
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ISSUES IN MURABAHA
Rebate in Early PaymentIf the customer makes early payment and
there is no commitment from the institution inrespect of any discount in the price of
Murabaha, than the institution has the sole
discretion in allowing them the rebate.
Rollover in Murabaha
Rescheduling is allowed but repricing is not
allowed.
Rollover is also not allowed.
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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.
Rebate on Early Payments
It is prohibited by Shariah Standards to give Rebate
to the client on early payment as under Murabaha the
price is fixed.
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Step by step Murabahafinancing1. Client and bank sign an
agreement to enter into Murabaha.
Murabaha
Agreement toMurabaha
IslamicBank
Client
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2. Client appointed as agent to
purchase goods on banks behalf
MurabahaStep by step Murabaha
financing
Agency
Agreement
Bank ClientAgreement to
Murabaha
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3. Bank gives money to client for purchase of goods.
Murabaha
Step by step Murabaha financing
Agreement to
Murabaha
AgencyAgreement
Disbursement to the client
Islamic BankBank Client
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MurabahaGENERAL MECHANICS
CUSTOMERISLAMIC BANK AgreementVENDOR
The customer approaches the Bank with therequest for financing
The Bank purchases and receives title of ownershipfrom the vendor
The Bank makes payment to the vendorThe Bank transfers the title over to the customer upon
payment
The customer makes payment up-front or on a
deferred basis
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Risk ManagementIN
MURABAHA
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Risk
DimensionsCredit
Banking
Risks
Credit
CreditLiquidity
Interest Rate
Market
Foreign Exchange
Solvency
Operational
Islamic Banks also face
-Additional asset risk
-Greater fiduciary risks
-Greater legal risk
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Legal and Sharia Risks
Legal and Sharia compliance risk
Completeness of Legaldocumentation for various contracts
Adherence to AAOIFI Sharisstandards
Role of Sharia supervisory boards/
advisers in mitigating Sharia risk
Live cases
Mistiming in signing of CommodityMurabaha contracts can lead to lost
income
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RISK IN Murabaha
Title to assets transferred to the
customer at the time of purchase
Usually the customer then providessame or other assets as collateral.
Role of purchasing department is
essential while customer is takingfrom various institutions bankingmurabaha facility.
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END OF PRESENTATION
JAZAKAMUALLAH