AL Baraka Islamic Bank B.S.C E.C.

IN HOUSE COURSE
 MURABAHA

Murabaha is a kind of sale where the

cost is disclosed and the price in
second sale is comprised of cost and
certain profit the price in this sale can
be both on spot and deferred
 BANKING MURABAHA

The product of Murabaha that is being used in

Islamic banking as a mode of finance is
something different from the normal murabaha
used in normal trade . It is a bunch of contracts
completed in steps and ultimately suffices the
financial needs of the client.
SCOPE OF MURABAHA
•As it is kind of sale, there must be a seller and
buyer and some thing that is bought and sold .
The bank is seller and the client is buyer.

•It cannot be used as a running finance facility ,

which provides cash for fulfilling various needs
of the client.

•It is a fixed price sale and normally is done for

short term.
Core Steps
CREDIT APPROVAL (under Shariah perspective)
Points to Be Considered While Approving Credit

Nature of the Business to be in scope of the Murabaha

Commodities Eligible the product must be halal and the

product must be viable for which murabaha facility can be
extended.

Cyclical nature of the business

Core Steps CONTINUED

SPECIFIED Commodities study in respect of

– Uniqueness
– Pricing
– Active Market
– Risk Profile
– Cash Flow to be generated by the client to repay
Murabaha facility availed.

After these consideration limit may be approved

 Key
Steps of Murabaha

• The Client orders the bank to buy certain goods for him and
sell to him the same after acquiring. The prerequisite is that
the goods are not already owned by the client.

• The Client should not have any contractual commitment

before the request of Murabaha.

The buyer should be distinct from the client.

 Key
Steps of Murabaha continued

• If the supplier is nominated by the client himself ,guarantee

for good performance can be demanded.

• Margin can be taken as the earnest money, after executing

of Murabaha it will become part of Murabaha price.Incase
Murabaha is not executed then it will be refundable after
recovery of losses if any.
 Key
Steps of Murabaha continued

•Agency Agreement is not the condition if the bank can

make direct purchases from the supplier ,and if through third
party than agency agreement is required.

•Goods must be specified in the agency agreement.

Specific agency
When the purchase of commodity is not of consistent
nature.
Global agency
When the purchase is of consistent nature and ABIB
is the sole banker of the client
 Key
Steps of Murabaha continued

•Advance payment can be made but the payment must be

made directly to the supplier

•Treatment of variation in quantity.

If the quantity is in excess and not material than there is no

problem. The bank can go a ahead with the transaction.

If material is in excess of the quantity for which financing is

availed than the bank will provide finance only to the limit
prescribed in Murabaha
 Key
Steps of Murabaha continued

If there is a rise in prices and the amount escalates for

which financing is availed than the transaction can only be
executed if
The bank has been informed
The bank has agreed
The bank accepts

If the above is not done than the bank will not consider it
as a purchase.
 Key
Steps of Murabaha continued
Change of commodity in the agency agreement can only be
allowed if bank agrees to such a change than the change can
be made in the agency agreement.

Delay in Supply from the Supplier.

It is incase where the time frame has been given in the agency
agreement and that time period expires than the bank can
cancel agency agreement.The client will refund the amount.

After acquiring order cancellation can only be done if the

client informs the bank and if the bank agrees than he can
cancel the order. The consequential liability from such
cancellation will not render the bank indebted
 Key
Steps of Murabaha continued

Rejection on ground of quality

If the client informs the bank before the execution the
Murabaha new quality can be acquired through new Murabaha.

After execution of Murabaha than the bank will not be liable

for any discrepancies.

Expenses to be borne by the Bank in respect of MURABAHA

TRANSACTIONS
 Key
Steps of Murabaha continued

Possession
Bank must possess the goods.
Goods must exists at the time of execution of Murabaha.
If the above two are not followed than the bank cannot
execute Murabaha.
Documentary evidence required at the time of possession
before execution of Murabaha is the delivery challan, gate
passes and sales tax invoices.

Murabaha payment to be made directly to the supplier by

the bank.
 Key
Steps of Murabaha continued

•Importance of Physical Inspection

•Registration is in the name of bank for those item where

registration is required.

•Murabaha Agreement when the goods are collateralized in

case of stock of hypothecation it will be done after the
execution of Murabaha.
 Key
Steps of Murabaha continued

Partial Financing
Request to the extent of partial requirements

Joint purchases.
Breaking the Murabaha price either in deferred or spot.

Fixed / floating rates

 Key
Steps of Murabaha continued

Rebate in early payment

If the client makes early payment and there is no commitment
from the bank in respect of any discount in the price of
murabaha with the client than the bank has the sole discretion
in allowing them the rebate.

Common practice is not allowed compensate in next transaction

with the same client can be done.

Amount earned due to delay payments will go to charity.

Key Issues

•Rescheduling is allowed but repricing is

not allowed.
•Rollover is also not allowed.
 MISCELLENEOUS

Reverse Murabaha – Musawama

Back to Back Murabaha.

Supplier credit should be passed to

the supplier.
Late payment remedy all the
payment can be due at once.
 IMPORT MURABAHA

Agency agreement should be

executed at the time of the opening of
letter of credit.
Letter of credit can be opened with al
Baraka Islamic bank or with other
bank.
 TIMING OF MURABAHA EXECUTION

If the client is taking finance for duties as

well than the bank will make the client as
agent or third party will be appointed as an
agent for this purpose and duty will be paid
by the Bank. The Murabaha will be executed
after the clearance and the payment of duties
goods to be in possession of the client
TIMING OF MURABAHA EXECUTION
continued

If the client is paying the duty itself than the

murabaha can be executed before the clearance.
If documents are present and goods are not
present than Bill of lading will be taken. Murabaha
can be executed but preferred that murabaha
should be executed after the arrival of the goods.

Goods are present and the documents are not

present Murabaha can be executed and shipping
guarantee will be issued to client.
TIMING OF MURABAHA EXECUTION
continued

Documents and goods are present

than the Murabaha can be executed
without any hesitation.
MURABAHA PRICING AND ITS
CONTENT
Sight L/c
Without any credit limit approved
Total Price is equal to out of pocket
expenses as cost plus commission as
profit on spot recovered.
Where credit facility approved
Total price is equal to out of pocket
expenses as cost plus commission
plus profit against credit
 MURABAHA PRICING AND ITS
CONTENT Continued

Finance for clearing duties and the

client is paying cost at the spot price
Then
Total price is equal to out of pocket
plus commission plus duties plus
profit (Profit will be on duties for the
credit period)
Other cost will be paid on spot
 MURABAHA PRICING AND ITS
CONTENT Continued

USUANCE
Supplier credit
Cost price plus commission plus profit no
accruing of profit against any credit.

Over the supplier credit the clients wants to

earn credit also
AL BARAKA ISLAMIC BANK B.S.C E.C.
IN HOUSE COURSE

JAZAKAMUALLAH