Murabaha Finance by Muhammad Tayyab Raza

Top 20 FREQUENT WORDS

murabaha 90 customer 60 asset 46 phase 27 price 27 payment 23 vendor 22 agent 21 model 19 sale 14 agreement 13 purchase 12 stage 12 agency 10 documentation 10 execution 10 transaction 10 iii 9 acceptance 8 finance 8

DOCUMENT KEY POINTS

derivation of murabaha i the word murabaha has been derived from the arabic word ribah which has literary meaning of profit
i the murabaha can be denoted as sale with profit

i it is the obligation of the seller to disclose the cost and profit to the buyer
features of murabaha i murabaha finance is not a loan given on interest it is a sale of asset s for cash deferred price

features of murabaha i murabaha finance can only be used for the purchase of fresh asset s only
this means that murabaha transaction cannot be executed for the asset s already purchased by the customer

features of murabaha i murabaha transaction can either be a cash sale spot payment murabaha or a credit sale deferred payment murabaha or a combination of both
i payment of murabaha price can be made in lump sum or in installments or combination of both

i the murabaha finance can be used to meet the working capital requirements
features of murabaha i it is a fixed price sale and normally is done for short term

model i i the simplest possible model emerges when the transaction involves two parties only bank and the customer
i from shari ah perspective it is an ideal model and its profits are fully justified because bank assumes all risks as vendor trader

phase bank sells asset s to the customer transfer risk and ownership to the customer at certain murabaha price
phase customer pays murabaha price in lump sum or in installments on agreed dates

model ii i in most cases murabaha transaction involves a third party ie vendor because bank is not expected to engage in sale of variety of products required for variety of customers
i the bank directly deals with the vendor and purchases the asset s

first between bank and vendor and second between bank and the customer
model ii i the bank sells the purchased asset s to the customer on cost plus basis

model ii phases phase customer identifies and approaches the vendor or supplier of the asset s and collects all relevant information
phase customer approaches the bank for murabaha financing and promises to buy the asset s

model ii a phases phase vendor delivers the asset s transfers the ownership of asset s to the bank
phase customer pays murabaha price in lump sum or in installments on agreed dates

model iii a banking murabaha i this murabaha model is mostly practiced model in banking now a days and therefore we will look at it in more detail
i it is also a three party structure but it is bit complicated than previous ones

model iii a banking murabaha i 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
i it is called murabaha to the purchase orderer

model iii a banking murabaha i it is a bunch of contracts completed in steps and ultimately suffices the financial needs of the client
i the sequence of their execution is extremely important to make the transaction sharia h compliant

phase i a promise to purchase and sell i the customer approaches the bank for murabaha finance and promises to purchase the asset s from the bank which the customer will purchase as an agent of the bank
i master murabaha finance agreement mmfa shall be signed by the bank and the customer at this stage

phase ii a appointment of agent i the appointment of an agent for purchase of asset s for and on behalf of the bank and the ultimate sale of such asset s to the customer shall be independent transactions of each other and separately documented
i however according to sharia h perspective it is preferable to appoint the agent other than the customer

phase ii a appointment of agent i agency agreement is not the condition of the murabaha if the institution can make direct purchases from the supplier
i it is advisable to execute agency agreement because financial institution does not have the expertise to identify the asset s and negotiate an efficient price

phase iii iv a purchahse of assets by agent i the customer identifies the vendor selects the asset s on behalf of the bank and advice its particulars including the vendor s name and purchase price to the bank
i if the supplier is nominated by the customer itself guarantee for good performance can be demanded from the customer

phase iii iv a purchahse of assets by agent i the customer takes possession of the asset s as an agent of the bank
i it is the obligation of the customer agent to ensure at this stage that asset s supplied is in accordance with the given specifications

phase iii iva documentation declaration from customer agent i the customer agent will inform the bank through this document that it has taken the possession of asset s on behalf of the bank
i this declaration must contain the statement that customer has inspected the asset s to ensure that its appropriateness and suitability to the customer

phase v disbursement of funds payment to vendor i the bank has two options regarding for payment of purchase price of asset s bought by agent on its behalf
b disbursement of funds to agent s customer s account for onward payment to vendor through cross cheque pay order demand draft etc

phase v documentation letter of disbursement i this documents is request from customer to disburse funds for payment to vendor
i the disbursement of funds to the customer shall be treated as advance against murabaha

phase vi murabaha execution stage offer and acceptance i the customer offers to buy the asset s from the bank which it has purchased as an agent of the bank
i this is the point where the murabaha comes in to existence

phase vi murabaha execution stage offer and acceptance i it is obligatory that the point when the risk of the asset s is passed on by the bank to the customer be clearly identified
i it is also mandatory to determine the date of payment of murabaha price rendering the murabaha to be valid

phase vi murabaha execution stage documentation a offer for purchase i the customer offers to buy the asset s purchased by it as an agent

phase vi murabaha execution stage documentation b bank s acceptance of offer i bank accepts the customer s offer and sells the asset s purchased by customer agent on its behalf on murabaha price to be paid on agreed future date
i the asset s must be in bank s possession by either way ie physical or constructive

phase vi murabaha execution stage documentation i this document must contain i
murabaha price cost profit ii

partly instant and partly in installment i this documents is required if the customer wishes to pay the murabaha price in installments
phase vi murabaha execution stage documentation c payment shedule summary i the customer has three options to pay the murabaha price

demand promissory note i after execution of murabaha the murabaha price will become the debt dyan on the customer
i this document is customer s acknowledgement to the debt amount and its promise to pay the debt

phase vii payment of murabaha price by customer i customer will pay the murabaha price to the bank on the agreed date
i the customer is not entitled to any reduction in murabaha price in case of early payment of murabaha price

securities in murabaha i the institution may ask the customer to furnish a security to its satisfaction for prompt payment of the deferred murabaha price
i it is also permissible that the sold asset s itself is given to the seller as a security

securities in murabaha i bank can obtain any of the following security from its customer client depending upon the nature of credit facility amount of facility and credibility of the customer
i hypothecation of assets i pledge of goods and or marketable securities

use of murabaha in imports i agency agreement must be signed before opening of l c in case of imports
i in case of usance l c murabaha execution stage is offer and acceptance stage even though the payment is made after usance period

use of murabaha in exports i in case of pre shipment normal procedure as adopted in local murabaha shall be strictly followed
however murabaha can be executed for fresh purchases required for next shipment against assignment of receivables for first shipment

rise in prices of asset s i if there is a rise in prices and the amount escalates for which financing is availed then the transaction can only be executed if the bank has been informed and the bank subsequently accepts the same
i the institution reserves the right to reject the purchases if made other then agreed price

i if agency agreement is for specific asset s then new agreement is required for changed asset s
change of asset s i change of asset s in the agency agreement can be done with mutual consent

delay in supply from the supplier i 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

rebate in early payment i if the customer makes early payment and there is no commitment from the institution in respect of any discount in the price of murabaha than the institution has the sole discretion in allowing them the rebate
under murabaha the price is fixed therefore it is recommended that issue should be brought in the knowledge of sharia h advisor

i rollover in a murabaha transaction would imply that payment of earlier murabaha price by executing new murabaha
rollover in murabaha i rollover is also not allowed

i in this case the share of seller bank should be mentioned on the invoice and that share should be separately kept to facilitate the verification by bank s officer
partial murabaha i at times customer may require partial financing for its shipment

i parties are considered to be related parties if one party has or more shares ownership in the business of other party
i banks are not allowed to enter into a murabaha transaction where vendor and customer are associated parties

Please note, This is an auto generated summary based on sentances position in the document and other factors

DOCUMENT WORD ANALYSIS

Main Category

AlHuda Material\islamic banking

KeyWords

contract price sale asset financing lease client purchase ijarah payment profit musharakah lessee amount commodity housing agreement contracts ownership project

DOCUMENT REFERENCES

Number of Pages

58

Published Date

2016-09-17 00:27:31

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Murabaha Finance by Muhammad Tayyab Raza

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Top 20 FREQUENT WORDS

DOCUMENT KEY POINTS

DOCUMENT WORD ANALYSIS

Main Category

KeyWords

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