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Sale Contract /Murabaha .

Muhammad Najeeb Khan 2

 CONTRACT IN ISLAM

CONTRACT

SUBJECT CONTRACTORS WORDING OF

MATTER CONTRACT

•Non-restricted •Present
•Specified
•Sane •Unconditional
•Quantified
•Mature •Non-contingent
Law of Contract
 Islamic Contract: It is connection
between the offer and the
acceptance in a manner that
results the proper affects.
 Offer
 Acceptance
 Subject matter
ISLAMIC SALE

 DEFINITION OF SALE(BAI)

– exchange of a thing of value with another

thing of value with mutual consent.

– the sale of a commodity in exchange of

cash.
ISLAMIC SALE
(1)-VALID SALE ( Bai Sahih)

– a sale is valid if all elements together with

their conditions are present

– elements of valid sale are

• Contract ( Aqd )
• Subject matter ( Mabe’e)
• Price ( Thaman )
• Possession or delivery ( Qabza )
 CONTRACT ( Aqd )
• Offer & Acceptance ( Ijab-o-Qobool)
– Oral ( Qauli )
– Implied ( hukmi )
• Buyer and seller ( Muta’aquadeen ) must be
– Sane
– Mature
• Conditions of contract ( Sharaet-e-Aqd )
– sale must be non-contingent
– sale must be immediate
 SOLD GOOD OR SUBJECT MATTER
( Mube’e )

• Existing
• Valuable
• Usable
• Capable of ownership/title
• Capable of delivery/possession
• Specific & Quantified
• Seller must have title & risk
 MURABAHA

Murabaha is a particular kind of

sale where the seller discloses its
cost and profit charged thereon.

 The price in this sale can be

both on spot and deferred.

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 Difference between
Murabaha & Musawima
• Murabaha is a particular kind of sale
where the seller discloses its cost and
profit charged thereon .

• Musawima is a sale on agreed price

without referring to the first price on
which the seller has purchased

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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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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 of the
client.

 The sequence of their execution is extremely

important to make the transaction Shariah
compliant.

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SCOPE OF MURABAHA
As it is a kind of sale, there must
be a seller and buyer and some
thing that is bought and sold . The
institution is the seller and the
client is buyer.
It cannot be used as a substitute
for running finance facility , which
provides cash for fulfilling various
needs 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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Step by Step Murabaha

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1- Promise stage
Stage One (a) for
Murabaha financing
1 . Client approach the bank for facility through Murabaha.

Bank Client
Facility
approved

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1- Promise stage
Stage One (b) for
Murabaha financing
1 . Client and bank sign an agreement to enter into Murabaha.

Bank Client
Murabaha
Facility
Agreement
MOU

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1- Promise stage
Stage One (c) for
Murabaha financing
. Client submit the purchase requisition to the bank.

Bank Client
purchase
requisition
/Promise to the
bank.
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2- Agency stage

2. Client appointed as agent to

purchase goods on bank’s behalf

Bank Client
Agreement to
Murabaha
Agency
Agreement

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2- Agency stage

Stage Two for Murabaha

financing
. Bank gives money to supplier
through client’s account for
purchase of goods.
Islamic Agreement to
Bank
Bank Murabaha Client

Agency
Agreement

Disbursement to the
Supplier 20
 3. Acquiring Possession
Stage three for Murabaha
financing
. Client purchases goods on bank’s
behalf and takes their possession.
Client purchases
goods and takes
Transfer of Risk Vendor possession

Bank Client

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 4. Execution of Murabaha
Stage four (a) for Murabaha
financing
. Client makes an offer to
purchase the goods from bank.

Bank Client

Offer to
purchase

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4. Execution of Murabaha
Stage four (b) for
Murabaha financing
. Bank accepts the offer and

sale is concluded.

Murabaha
Agreement
+
Bank Client
Transfer of Title

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 4. Execution of Murabaha

Stage four (b) for Murabaha financing

. Client pays agreed price to bank

according to an agreed schedule.
Usually on a deferred payment basis
(Bai Muajjal)

Payment of Price
Bank Client

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 Murabaha
GENERAL MECHANICS

VENDOR ISLAMI BANK Agreement CUSTOMER

C

• The customer approaches the Bank with

the request for financing
• The Bank purchases and receives title of
ownership from the vendor
• The Bank makes payment to the vendor
• The Bank transfers the title over to the
customer upon payment
• The customer makes payment up-front or
on a deferred basis 25
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
A- CREDIT APPROVAL
(under Shariah perspective)

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 CREDIT APPROVAL
(under Shariah perspective)

Points to Be Considered
While Approving Credit

It is essential that the transaction

between two parties must be genuine ,
not fictitious.

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 CREDIT APPROVAL
(under Shariah perspective)

Points to Be Considered
While Approving Credit

The Institution must insure that the

party from whom the item is bought is
a third party and not the customer or
his agent . In this manner the
transaction can be saved from Bai Inah
(Buy Back) which is not allowed in
sharia. 29
STAGES OF MURABAHA

PRIOMISE STAGE
B- Murabaha Facility Agreement
MOU

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 Murabaha Facility
Agreement
MOU
 Mentioning Limits of each facility
 Security to be submitted by the
Customer
 Other terms and conditions
covering all the facilities
approved for the Customer.
 The Agreement to be signed by
both the parties.
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Securities Against
Murabaha Price

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 STAGES OF MURABAHA

PRIOMISE STAGE
C- Purchase Requisition

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C- Purchase Requisition
 The Client orders the
institution to buy certain goods
for him and sell him the same
after acquiring.
 Containing the details of the
goods required to purchase
from the Supplier, Cost Price
and expected date of delivery
 The prerequisite is that the
goods are not already owned by
the client.
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STAGES OF MURABAHA

PRIOMISE STAGE
D- Promise to Purchase

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D- Promise to Purchase
At this stage the customer
promises the institution to buy the
goods which were acquired by the
institute on his request.
Normally Purchase requisition
contains this Promise.

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STAGES OF MURABAHA

PRIOMISE STAGE
G- PAYMENT OF MURABAHA
Goods

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 G- PAYMENT OF
MURABAHA Goods

 Advance payment can be made to the

supplier.
 It is advisable that Murabaha payment
to be made directly to the supplier by
the bank.

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STAGES OF MURABAHA

2-AGENCY STAGE

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AGENCY STAGE
 Agency Agreement is not the
condition of the Murabaha if the
institution can make direct
purchases from the supplier.

 The financial institution, does

not have the expertise to identify
the goods and negotiate an
efficient price.

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AGENCY STAGE
The customer, however, being in
the industry, can do this.

 The institution therefore

appoints him as its Agent (which
is also permissible), in the first
step of the transaction, to identify
and procure the goods on
institution behalf.

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AGENCY STAGE
This is done by execution of
Agency Agreement between the
institution and the customer.

However according to Sharia

Perspective it is preferable to
appoint the Agent other then
customer.
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AGENCY STAGE

If goods are acquired from

third party the execution of
agency agreement will be
between the institution & the
third party..

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 AGENCY STAGE
TYPES OF AGENCY AGREEMENT

1. SPECIFIC AGENCY AGREEMENT

When the purchase of commodity is not of
consistent nature.
2. GLOBAL AGENCY AGREEMENT
When the purchase of commodity is of
consistent nature.

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STAGES OF MURABAHA

3-ACQUIRING POSSESION

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 Acquisition Of Title &
Possession of The Asset


1-Institution must take actual or

constructive possession of the
item .
 The forms of taking delivery or
possession of items differ according to
their nature and customs.
 The item must move from the
responsibility of the supplier to the
responsibility of the institution .
 It is obligatory that the point when the
risk of the item is passed on by the
institution to the customer, be clearly
identified. 46
 Acquisition Of Title &
Possession of The Asset
2.Goods must exists at the time
of execution of Murabaha.

 If the above two are not fulfilled than

the institution cannot execute
Murabaha.

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 Acquisition Of Title &
Possession of The Asset
 Documentary evidence required at the
time of possession before execution of
Murabaha i.e. delivery challan, gate
passes and sales tax invoices.

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Physical Inspection

Importance of Physical
Inspection.
It is advisable that bank should
appoint one person for physical
inspection .Importance of Physical
Inspection

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 STAGES OF
MURABAHA

4- EXECUTION OF
MURABAHA
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Actual Murabaha Sale

OFFER & ACCEPTANCE

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 OFFER TO PURCHASE

 The Customer will make an offer to

purchase the goods acquired by him
for Bank’s behalf mentioning the
Offer Price .(Comprising Cost plus
Bank’s Profit )

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 BANK’S ACCEPTANCE

 The Bank will accept the offer made by the

Customer. All the terms of the Murabaha
Transaction such as Sale Price ( Cost plus
Profit ) Due Date or Schedule of Payments
etc. must be mentioned in the Bank’s Letter
of Acceptance.
.

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 RELATIONSHIP

 At this stage relation of a Buyer & Seller

comes into operation between the
institution & the client.
 Since the sale is effected on deferred
payment basis, the relation of Debtor
and Creditor also emerges between them
simultaneously.

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ISSUES IN MURABAHA

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Rollover in Murabaha

Rescheduling is allowed but

repricing is not allowed.
Rollover is also not allowed.

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Risk Management
IN
MURABAHA

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 Risk Credit

Dimension
Liquidity
s Credit
Credit

Prising risk
Banking
Risks
Market
IslamicBanks
Islamic Banksalso
alsoface
face

--Additional
Additionalasset
assetrisk
risk Foreign Exchange
--Greater
Greaterfiduciary
fiduciaryrisks
risks

--Greater
Greaterlegal
legalrisk
risk Solvency

Operational
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END OF PRESENTATION

JAZAKAMUALLAH

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