•AAMIRMUMTAZ

•ABDUL SALAM
•ADNAN ABID
•AHMAD ALI
• Islamprohibits 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
 “MURABAHA is a particular kind of sale in which
seller honestly discloses the cost incurred on the
sale of commodities to be sold and sell to the
buyer at disclosed cost plus mutually agreed
profit margin ratio”.
 A simple sale in Arabic is called Musawamah - a sale without
disclosing or referring to the cost of goods sold

 However when the cost price is disclosed to the client, it is called

Murabaha.

 The distinguishing feature of Murabaha from ordinary sale is

- The seller discloses the cost to the buyer
- And a known profit is added

 A simple Murabaha is one where there is cash payment and

Murabaha Muajjal is one on deferred payment basis.
 In case of riba, lender of the money gets a
specific interest on the amount lended, after a
specific time period, whereas the principle
retains in the ownership of the lender.

 While in murabaha, there is no loan, instead one

person sells a commodity to other and the
possession as well as the risk transfers to the
buyer, and the seller get his reward in the shape
of profit.
 Financing of purchasing commodities and goods
from the local markets
 Financing import and export transactions
 Financing fix assets (machines and equipments)
 Financing of working capital (purchasing
feedstock used for production)
 Financing construction and installations material
purchases
 Financing purchasing of real estate (land and
building)
 Murabaha is not a loan given on interest. It is a
sale of a commodity for a deferred price which
includes an agreed profit added to the cost.

 Being a sale and not a loan, Murabaha should

fulfill all the conditions necessary for valid sale.

 The financier must have a good title to the

commodity before he sells it to his client.
 The commodity must come into possession of the financier,
whether physically constructively, in the sense that the
commodity must be in the risk of the financier even though
the risk may be for a short period.

 The best way for Murabaha according to Shariah is that

financier himself purchases the commodity and keeps it in
his own possession or purchases the commodity through a
third person appointed by him as his agent before he sells
it to the customer. However, it is also allowed that the
financier may make the client himself his agent to buy the
commodity on his behalf.
 Firstly,
The client and the institution sign an over-all agreement
whereby the institution promises to sell and the client
promises to buy the commodity on an agreed ratio of
profit added to the cost.

Bank Client
Agreement to
Murabaha
 Secondly,
The institution appoints the client as his agent
for purchasing the commodity on his behalf and
an agreement of agency is signed by both the
parties

Bank Client
Agreement to
Murabaha
Agency
Agreement
 Thirdly,
The client purchases the commodity on behalf of
the institution and takes its possession as an
agent of the institution.

Bank Client
Agreement to
Murabaha
Agency
Agreement
 Fourthly,
The client informs the institution that he has
purchased the commodity on its behalf and at
the same time makes an offer to purchase the
commodity from the institution.
Client
client purchases
Transfer of Risk
goods and
takes
  possession

Bank vendor
The client makes an offer to purchase
the commodity from the institution

Client
Bank

Offer to purchase
 Fifthly,
The institution accepts the offer and the sale is
concluded whereupon the ownership as well as
the risk of the commodity is transferred to the
client.

Murabaha
Agreement
+
Transfer of Title

Bank Client
• Meezan Bank has been using Murabaha to finance purchase of raw material
by its clients.
• They have successfully entered into Murabaha transactions with a number of
clients. Some of them are:

Client Transaction volume (Rs in

millions)

ICI 270
PSO 200
PARCO 100
NEWAGE CABLES 75
SITARA CHEMICALS 50
 The most essential element of the transaction is
that the commodity must remain in the risk
of the institution during the period between
the third and the fourth stage..

 It is also a necessary condition for the validity of

Murabaha that they purchased from a third
party. The purchase of the commodity from the
client himself on a buy agreement is not allowed
in the Shariah.
 The abovementioned procedure of the Murabaha
financing is a complex transaction which the
parties involved have different capacities
different stages .

 All these capacities must be kept in mind and

must come into operation with consequential
effects each at its relevant stage and these
different capacities should never be mixed
up confused with each other.
 In the event of default by the buyer (client) in
respect of the payment of the purchase price on
the due date, the purchase cannot be
increased. However, if he has undertaken in
the agreement to pay an amount for a charitable
purpose, as mentioned in clause 7 of the rules of
Bai'Mu'ajjal, he shall be liable to pay the amount
undertaken to be paid by him.
 The most common mistake is to assume that
Murabaha can be used for all types of
transactions and financing. This mode can only
be used when a commodity is to be purchased by
the customer. If funds are required for some other
purpose Murabaha cannot be used.

 The document is signed for obtaining funds for a

specific commodity and therefore it is important
to study the subject matter of the Murabaha.
 In some cases, the sale of commodity to the client is
affected before the commodity is acquired from the
supplier. This occurs when the various stages of the
Murabaha are skipped and the documents are signed all
together. It is to be remembered that Murabaha is a
package of different contracts and they come into
play one after another at their respective stages.

 It is observed in some financial institutions that

Murabaha is applied on already purchased
commodities, which is not allowed in Shariah.
 Default Case
In the case of default by the buyer in the
payment of price at the due date, the price
cannot be increased. However if he has
undertaken, in the agreement to pay certain
amount for a charitable purpose, he shall be
liable to pay the amount undertaken by him.
 Rebates in Early Payment
If the customer makes the payment before the due date
and there is no commitment that he would gain any discount
in the price of Murabaha. Then it is permissible for bank to
give any rebate to the client.

 Rises in Prices and Change in Assets

The institution reserves the right to reject the purchases if
made other then agreed price. Change of Asset(s) in the
agency agreement can be done with mutual consent. If
Agency Agreement is for specific Asset(s) then new
agreement is required for changed Asset(s).
 Murabaha with Related Parties
In case of Murabaha, the Vendor and the Customer must be
independent to each other. Banks are not allowed to enter
into a Murabaha Transaction where Vendor and Customer are
associated parties. Parties are considered to be related parties
if one party has 33% or more shares/ownership in the
business of other party.

 Delays in the Supply from 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 the cost of goods.
 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.

 Purchase Evidence
The customer is required to submit purchase evidence
and declaration. The purchase evidence must confirm
that customer as an agent has purchase the goods
after agency agreement
 RISK FACTOR RISK SOLUTION
CATEGORY

1. AGENCY RISK CREDIT RISK Pre-inspection and direct

payment to the vendor.
2. OWNERSHIP CREDIT RISK Takaful of goods during
TRANSFER/ASSET transit and induce customer
RISK to submit declaration
immediately after the
purchase of goods.

3. PAYMENT/ DEFAULT CREDIT RISK Obtain Shariah compliant

RISK collateral and adapt
staggered payments.
4. PRICE RISK MARKET RISK Time lag between purchase
and offer acceptance
should be minimum.
 RISK FACTOR RISK SOLUTION
CATEGORY

5. LIQUIDITY RISK LIQUIDITY RISK Make separate pools for

different maturities
considering their different
maturity dates.
6. PROFITABILITY RISKOPERATIONAL RISK A charity may be imposed
to discourage a delay to
make Murabaha
repayments
7. LEGAL RISK OPERATIONAL RISK Proper documentation and
timely checking is required.

8. SHARIAH NON OPERATIONAL RISK Ensure that relevant staff

COMPLIANCE RISK has appropriate training
and has proper knowledge
There may be three different cases for payment of Murabaha
pricing.
1. Bullet Payment
Murabaha Price = Principal+ Principal x Profit Rate x No. of
days
= 1,000+ (1,000*.10*1) = 1,100
2. Payment in Equal Installments
The payment is calculated by using IRR (Internal Rate of Return)
formula
Installment = [(principal x rate)/ (1-(1/ (1+rate) ^n)]
= [(1,000*.10)/ (1-(1/1.10) ^12)
Murabaha Price = Installment x n
3. Unequal installments
In such a way, profit part of the selling price is paid
over the total tenor of the transaction, whereas the
principle amount is paid at maturity. Price is calculated
as following:

Murabaha Price = Principal amount+ Principal x Profit

rate x No. of days

Interim Installment = Principal x Profit rate x No. of days

(days per period)
 
 PRE ADOPTION
 Murabaha Financings were
recorded at the time of
disbursement of funds.
POST ADOPTION
 Funds disbursed for purchase of
goods are recorded as ‘Advance
for Murabaha’. On culmination of
Murabaha i.e. sale of goods to
customers, Murabaha Financings
are recorded at the deferred sale
price net of profit payment

 Goods purchased but remaining  Goods Purchased but remaining

unsold at the balance sheet date unsold at the balances sheet date
were recorded as ‘Advance against are recorded as Inventories
future Murabaha’.
Example Amount in Rs. / %
Purchase price/Cost/Principal 1000

Profit Rate 10%

Tenure 1 year

Total profit on transaction 100

Sale price (Contract price) 1,100

Date of Disbursement to Jan 1, 2010

supplier/customer

Date of Culmination of Murabaha Jan 15, 2010

Transaction

Date of Maturity of Murabaha Dec 31, 2010

A-When there is bullet payment of profit and Cost
(Principal) at the end of the period:

 1) At the time of payment to the client for the purchase of

goods on behalf of bank or directly to the supplier by the bank
the transaction will be accounted for as follows:

2010, January 01

Dr Advance against Murabaha (B/S Asset side) 1,000

Cr Pay Order / Party Account (B/S Liability side) 1,000

 At the Culmination of Murabaha i.e.

At the time of sale of goods to the customers with

signing of Declaration by the bank and the client
following entries would be passed:

2010, January 15

Dr Murabaha Financing 1,000

Dr Unearned Murabaha Profit Receivable 100
Cr Advance against Murabaha 1,000
Cr Deferred Murabaha Income 100
 Booking of Accrual of profit@ 10% from the date of
disbursement to the date of culmination, the following
entry would be passed. [(1000 x 10%) x 15 / 365]:

2010, January 15

Dr Deferred Murabaha Income 4.10

Dr Murabaha Profit Receivable 4.10
Cr Income on Murabaha Financing 4.10
Cr Unearned Murabaha Profit Receivable 4.10
 Booking of Accrual of profit@ 10% for remaining days
of the month, the following entry would be passed. [(1000
x 10%) x 16 / 365]:

2010, January 31
Dr Deferred Murabaha Income 4.39
Dr Murabaha Profit Receivable 4.39
Cr Income on Murabaha Financing 4.39
Cr Unearned Murabaha Profit Receivable 4.39

And so on this entry will be passed at the end of EACH month

till maturity for the accrual of profit.
 On Maturity of Murabaha transaction i.e.

On December 31, 2010 and at the time of receiving

of final payment following entry would be passed:

 2010, December 31

Dr Party Bank A/c 1,100

Cr Murabaha Financing 1,000
Cr Murabaha Profit Receivable 100
 Treatment for Inventory
If goods purchased for Murabaha remain unsold on the
reporting date they are shown as “Murabaha Inventory”
in Other Assets.

Following are possible scenario:

 Bank is holding assets for future sale to its customers

against a promise
 The Goods are imported as Bank’s agent and are not sold
to the importers
 Any other reason due to which the goods remain unsold
 YEAR TOTAL Assets MURABAHA % OF MURABAHA REVENUES MURABAHA SALES % OF MURABAHA of
BANKS FINANCING FINANCING Murabha Sales

2009 29304960 9667814 32.99% 2555597 1349821 52.82%

ALBARAKA

2008 24197826 8562432 35.38% 1764924 1090725 61.80%

2007 22077113 6994844 31.68% 1493035 764279 51.19%

2009 124181734 16645275 13.40% 10102060 5090510 50.39%

MEEZAN BANK

2008 85276070 14590314 17.11% 6803213 4689554 68.93%

2009 35368894 2430861 6.87% 3047195 1102381 36.18%

DUBAI ISLAMIC
BANK
2008 32050078 2559791 7.99% 2723796 905896 33.26%

2007 21308247 2205258 10.35% 1119716 308965 27.59%

2009 19762450 3453856 17.48% 1914228 220904 11.54%

EMIRATES GLOBAL
BANK
2008 16537387 3150693 19.05% 1060376 18135 1.71%

2007 8941475 1152289 12.89% 381172 139730 36.66%

Description Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08

Total Assets 13 44 72 118 276 276

%age of Banking Industry (Total Assets) 0.50% 1.40% 2.10% 2.90% 4.20% 4.90%

Deposits 8 30 50 83 202 202

%age of Banking Industry (Deposits) 0.40% 1.20% 1.90% 2.80% 4.10% 4.80%

Financing. & Invest. 10 30 48 72 186 187

%age of Banking Industry (Financing $ 0.50% 1.30% 1.80% 2.40% 3.60% 4.40%
Investments)

Conventional Banks with Islamic

Banking Branches 3 7 9 12 12 12

No. of Branches (Including Sub

Branches) 17 48 70 150 289 514

Underlying Islamic Mode Murabaha
Type of Product Corporate / SME
Basis for Pricing KIBOR Based/Risk Rating/Bank's

Minimum Financing Limit No

Maximum Financing Limit as per SBP Prudential Regulations (PRs)

Minimum Tenors 7 days

Maximum Tenors 1 day

Target Customers corporate

Security/Collateral Required Cash / MOTD /Letter of
Hypothecation/Pledge
Underlying Islamic Mode Murabaha
Type of Product Corporate / SME

Basis for Pricing KIBOR based fixed rates for each

transaction.

Minimum Financing As per PRs and subject to bank's

internal assessment for allocation of
limit
Maximum Financing Limit As per PRs and subject to bank's
internal assessment for allocation of
limit

Minimum Tenors 90days

Maximum Tenors 1 year

Target Customers All customers falling under corporate,

SME sector
Underlying Islamic Mode Murabaha

Type of Product Corporate / SME

Basis for Pricing KIBOR

Minimum Financing As approved by bank's credit

committee

Maximum Financing Limit Rs.900 million (linked with bank's

equity)
Minimum Tenors 15 days

Maximum Tenors 180 days

Target Customers Corporate, SME

Security/Collateral Required Cash margin, Equitable/registered

Underlying Islamic Mode Murabaha

Type of Product Corporate / SME and Investment

Banking

Basis for Pricing depend on the credit worthiness of the

client

Minimum Financing No

Maximum Financing Limit As per PR’s

Minimum Tenors no

Maximum Tenors 3 years

Target Customers SME, Local Corporate

Security/Collateral Required pledge of commodity finance inclusive

Underlying Islamic Mode Murabaha

Type of Product Corporate / SME , Commercial

Basis for Pricing Cost plus mutually agreed profit

Minimum Financing As per PR’s

Maximum Financing Limit As per PR’s

Minimum Tenors NA

Maximum Tenors 1 year

Target Customers Manufacturing industries, Construction

Industries, Traders and Individuals

Security/Collateral Required Hypothecation of assets, Charge on

Thank
You!