MURABAHA

Definition

• Sale of goods at cost plus an agreed profit

mark-up.

• Seller should inform the buyer of the cost of

the goods and the required amount of profit.

Murabaha Terms

• Revealing cost to Buyer.

• Goods initially acquired by valid

contract.

• Seller should disclose any defects

or faults of goods.

• First contract should be free of

usury.

Murabaha Terms

• Seller should disclose terms of first

contract e.g first purchase was on

credit.

• If any of above conditions are not

met buyer has option to:

– Proceed,

– Cancel contract or

– recourse to seller for discrepancy.

Purchase order Murabaha

• Sale in which:

– One party asks the

other to purchase an

asset, and

– Then sell it to him on

Murabaha basis.

Cont.

• Customer promises the Bank

to buy asset

• Bank buys and owns asset.

• All of Murabaha terms should

be met.

• Customer is/is not obliged to

make his promise.

Motive for purchase order

Murabaha

• Accessing expertise.

• Accessing finance.This

is, currently,the

dominant motive.

• Minimizing risk

• Legal considerations.

Is Murabaha a Credit Sale?

Credit Sale:

installments or one payment

Cash Sale

Obligation in Purchase Order

Murabaha

• Early Sharia Scholars & existing Figh Academy

ruled that customer is not obliged to meet his

promise.

• However, a few contemporary Scholars ruled that

customer is obliged to meet his promise.

• Most of Islamic banks follow the second Fatwa.

Why not to oblige Customer?

• To avoid the possibility that “seller sells goods he

doesn’t own”.

• To avoid the case of an “advance with a

premium (Riba)”.

• To avoid the case of “two sale contracts

concealed in one”.

Purchase order Murabaha with

Obligation

• Request by customer to bank.

• If bank accepts request, it is bound to purchase asset

from vendor via valid sale contract.

• Bank offers asset to customer who is bound to

accept it.and should establish sale contract.

Cont.

• Bank can ask customer to pay “Hamish-gedyah” when request is made.

• If Murabaha contract is concluded “Hamish-Gedyah” becomes part of price.

• If customer reneges on his promise, bank recourse to “Hamesh-gedyah” for amount of damage.

Cont.

• If not enough, bank may recourse to

customer for further compensation.

• Some banks use Urboun instead of Hamish-

Gedyah”

Hamish-Gedyah VS. Arboun

• Both are part of price if Murabaha contract is

concluded.

• Hamish-Gedyah is used to pay for actual

damage if Murabaha contract is not concluded.

• Urboun is taken in full, whether it is more or

less than damage, if Murabaha contract is not

concluded.

Purchase order Murabaha

without Obligation

• Request by customer is considered

willingness to buy not an offer.

• If bank accepts, it acquires the asset.via

valid contract.

• Banks offers asset to customer.

• Customer has option to accept or decline

offer.

Cont.

• If he accepts contract is concluded.

• If he declines offer asset remains in possession

of bank.

• If an advance payment is required it should be

made after acceptance of offer & is part of

price..

• No Hamis-gedyah or Urboun.

Guarantee

• It is permissible to ask for guarantee or

collateral in Murabaha.

• It may take any of these forms:

– Purchased asset.

– Any other property.

– Third party guarantee.

– Personal guarantee.

Pricing

• Bank adds the required profit to cost of asset.

• Profit becomes part of selling price.

• Murabaha term can affect amount of profit ie banks

take more profits for longer maturity.

• For flexibility banks use Hamish -Almurabaha,which is

based on cost of money, to calculate profit.

Murabaha Debts

• Murabaha transactions normally create debts.

• Collection of debts should not be linked to disposition of goods.

• Title to the goods passes to customer on signing of contract.

Default

• Bank can not increase price if

customer defaults.

• It can not charge a penalty either

• That would be Riba.

Debt collection Procedures

• Genuine insolvent debtor.

• Procrastinating solvent debtor.

Genuine insolvent debtor

• Defer collection until

customer is solvent.

• This is required by a

verse of Quran.

Procrastinating Solvent debtor

• Criminal procedures if debtor issued

post-dated checks.

• Civil procedures to regain debt and

claim compensation for actual

financial loss ie selling collateral.

• Civil procedures to remedy damage

for lost opportunity.