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  The word Murabahah has been
derived from the Arabic word –
RIBAH (profit).

 The Murabahah can be denoted as

“Sale with Profit or cost plus
markup.
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 MURABAHAH (COST PLUS)

 It is a contract of sale and purchase at

a specified profit margin between the
owner of goods and the buyer.

 In such a sale and purchase contract

the cost and profit must be known
and agreed by both parties to the
contract.

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 Scope of financing
1. Short term Consumer Financing
2. Working Capital Financing
3. Vehicle Financing
4. Trade finance products including imports,
exports and alternative to bill purchase

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 BANKING MURABAHAH

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 MURABAHAH

 It is called Murabahah to the purchase order.

 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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 GENERAL MECHANICS

VENDOR ISLAMIC BANK Agreement CUSTOMER

• 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

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 Pillars
There are five PILLARS of Murabahah sale:
 Seller
 Buyer
 Item sold
 Price
 Contract

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 Condition
 three conditions of seller and buyer:
(i) capable of taking responsibility. They must: be of
sound mind, (aqil) i.e. not mad, not mentally
retarded, nor children; have reached the age of
puberty (baligh); and have reached majority 18
years old and able to manage their own affairs

(ii) not prohibited from dealing with their property,

i.e. not declared bankrupts or prodigals

(iii) no coercion/force is exerted on either of them

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 Condition
 six conditions for element item sold:
(i) it must exist;
(ii) it must be pure (halal) according to the shari’ah. It
must not be: a pig and dog or its product, a
carcass, an intoxicating drink, blood, vomit and
excreta i.e. urine;
(iii) it must have use according to the shari’ah, i.e., it
must not be too little as to be of no use, such as a
few grains of rice or half a date fruit; not distract
from remembering Allah like musical
instruments; and not be used for haram
purposes like worshipping other than Allah,
practicing riba or gambling
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 Continued…

(iv) it must be owned by the seller;

(v) it must be capable of being delivered; and it must

be free from encumbrances; and finally,

(vi) it must be known and specific by address,

description or specification.

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 Both parties agreed with the price offered.
 If the seller lies about the cost of the good to be sold, the
buyer has right to withdraw from the contract.

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 Method: lump sum payment upon
maturity
Selling Price (SP)= CF+ (CF x i x n/365)
CF- cost of financing (purchase price)
i- rate of return per annum
n- periods of financing in days

Total Profit = SP - CF
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 Akram approaches the Islamic bank and applies for
financing under the concept of murabahah. He wants to
buy a machine for his factory with the purchase price of
RM50,000 and the profit rate the bank want to charge is
10 %. The period of financing is 6 months and Akram will
make a lump sum payment upon the expiry of maturity.
 Calculate how much is the selling price and the total
profit earn by the Islamic bank?

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 Also known as a contract sale between the bank and its client
for the sale of goods at a price which includes a profit margin
agreed by both parties

 Involves the purchase of goods by the bank as requested by

its client

 Goods are sold to the client with a mark-up

 Repayment is paid in a lump-sum or installment which is

specified in the contract

 Short-term deferred sale.

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ISSUES ON MURABAHAH
1. Securities against Murabahah
Payments coming from the sale are receivables and for this, the client may be
asked to furnish a security. It can be in the form of a mortgage or hypothecation or
some kind of lien or charge.
2. Guaranteeing the Murabahah
The seller can ask the client to furnish a 3rd party guarantee. In case of default on
payment the seller may have recourse to the guarantor who will be liable to pay
the amount guaranteed to him. There are two issues relating to this:
a) The guarantor cannot charge a fee from the original client. The reason being
that a person charging a fee for advancing a loan comes under the definition of
riba.
b) However the guarantor can charge for any documentation expenses.
3. Penalty of default
Another issue with Murabahah is that if the client defaults in payment of the price
at the due date, the price cannot be changed nor can penalty fees be charged.
In order to deal with dishonest clients who default in payment deliberately, they
should be made liable to pay compensation to the Islamic Bank for the loss
suffered on account of default.
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ISSUES ON MURABAHAH
However these should be made subject to the following conditions:
a) The defaulter may be given a grace period of at-least one-month.
b) If it is proven beyond doubt that the client is defaulting without valid excuse
then compensation can be demanded.
4. Rollover in Murabahah
Murabahah transaction cannot be rolled over for a further period as the old
contract ends. It should be understood that Murabahah is not a loan rather the
sale of a commodity, which is deferred to a specific date. Once this commodity is
sold, its ownership transfers from the bank to the client and it is therefore no
more a property of the seller. Now what the seller can claim is only the agreed
price and therefore there is no question of effecting another sale on the same
commodity between the same parties.
5. Rebate on earlier payments
Sometimes the debtors want to pay early to get discounts. However in Islam,
majority of Muslim Scholars including the major schools of thought consider this
to be un-Islamic. However if the Islamic bank or financial institution gives
somebody a rebate on its own, it is not objectionable especially if the client is
needy.
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ISSUES ON MURABAHAH
6. Calculation of cost in Murabahah
The Murabahah can only be effected when the seller can ascertain the exact cost
he has incurred in acquiring the commodity he wants to sell. If the exact cost
cannot be ascertained then Murabahah cannot take place. In this case the sale will
take place as Musawamah i.e. sale without reference to cost.
7. Subject matter of the sale
All commodities cannot be the subject matter in Murabahah because certain
requirements need to be fulfilled. The shares of a lawful company can be sold or
purchased on Murabahah basis because according to the principles of Islam the
shares represent ownership into assets of the company provided all other basic
conditions of the transaction are fulfilled. A buy back arrangement or selling
without taking their possession is not allowed at all.
Murabahah is not possible on things that cannot become the subject of sale. For
example, Murabahah is not possible in exchange of currencies.

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 Definition:
BBA is a deferred payment sale whereby the goods
will be delivered to the purchaser at the time of
sale, but the payment is postponed to a specific
time mentioned.
Purpose:
 The purpose of this kind of sale is to assist the purchaser
who are not able to pay in cash transaction for a necessary
property such as a house.

The transactions carried out using the BBA concept

can be legalized as long as it do not involved ribawi
items such as gold, silver and foodstuffs, which
involved the exchange of the same types of
commodities.
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 SELLER
BUYER
PRICE
PROPERTY
OFFER & ACCEPTANCE

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  TO ENSURE VALIDITY OF CONTRACT:
Must be capable of accepting responsibilities.
They must: be a person of sound mind, (aqil) i.e. not
mad, not mentally retarded, nor children; have
The reached the age of puberty (baligh)
seller & Seller and buyer also are not prohibited from dealing
buyer with their property, i.e. not declared bankrupts or
prodigals

No coercion is exerted on either of seller and buyer.

Goods to Must be existence, permissible, valuable/useful,

be sold deliverable and known to both parties to the contract.

Price Must be known in a specified curency.

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 i. Customer purchases the property from the
vendor and the customer intends to settle the
purchase price using bank financing.
ii. The bank purchases the property from the
customer at the bank’s purchase price, which is
equivalent to the financing amount. The
purchase money (financing amount) received by
the customer will be used to pay vendor.
iii. The bank will immediately sell back the property
to the customer on a deferred payment basis –
say, over 10 years – by monthly installments and
the amount paid by the customer will be a
marked-up price.
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 Customer approaches bank and
purchase the property from
vendor

The bank immediately sells the Bank

Customer property to customer with
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 Basically, there are two ways of recognizing profit:

 Adopting a proportionate allocation of profit over the

period of deferment of payment regardless of whether
cash is received.
 Recognizing the profit as and when installments are
received.

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 Revenue and costs of goods sold
shall be recognized at the time of
conclusion of the sale contract
subject to deferral of profit

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PROCRASTINATION (DELAY) IN
PAYMENT
INTENTIONAL GENUINE PROCRASTINATION
PROCRASTINATION
For instance: insolvency,
Delay in payments is
penalty cannot be
made on purpose
imposed on the
customer
Penalty (based on
mutual agreement or by
court order) will be
imposed on the
customer

Penalty received is
treated as revenue or
allocation to a charity
fund

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 BBA Financing Installment using
Constant rate of return (CRR)
COMPONENT COMPUTATION DETAILS
FORMULA

Annuity Factor (AF) i(1+i)n i = Periodic profit rate p.a. or

CRR rate
(1+i)n -1 n = Total number of periodic
payments
Periodic AF x Purchase AF = Annuity Factor
Repayment (PR) price Purchase price = Financing
amount
Selling Price PR x n PR = Periodic Repayment
n = Total number of periodic
payments

Profit Amount Selling Price – Purchase Price

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 Example:
 Ahmad approaches the Islamic bank and applies for
financing under the concept of BBA. He wants to buy a
house with the purchase price of RM700,000 and
the profit rate the bank want to charge is 8 %. The
period of financing is 20 years and Ali has to repay the
selling price in 240 installments.

 How much is the monthly installment, selling price

based on CRR method and the total profit of this
financing?

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 BBA Financing Installment using
Constant rate of return (CRR)
COMPONENT COMPUTATION DETAILS
FORMULA
Annuity Factor (AF) i(1+i)n i = 0.08/12 = 0.006667
(1+i)n -1 n = 240 payments
= 0.006667(1 + 0.006667)240 = 0.00836423
(1 + 0.006667)240 - 1
Periodic Repayment AF x Purchase price AF = 0.00836423
(PR) Purchase price = RM700,000
0.00836423 x RM700,000 = RM5,854.96
Selling Price PR x n PR = RM5,854.96
n = 240 payments
RM5,854.96 x 240 = RM1,405,190
Profit Amount Selling Price – Purchase Price
RM1,405,190 – RM700,000 = RM705,190
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 BBA Financing Installment with
Grace Period Profit (GPP)
 Grace period of profit is charged when the bank is
financing a property under construction. As such,
during the construction period, customer will pay the
grace period profit only.
 During this grace period, the bank may charge a grace
period profit to avoid loss of income pending the
completion of the dwelling.

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 Computation for BBA with Grace
Period Profit (GPP)
Grace Period Profit (GPP)= (GPPR x PP x GPy)/ 2

GPPR- gross period profit rate

PP- purchase price
GPy- grace period in years

Instalment amount during grace period = GPP/GPm

GPm- grace period in months

Selling Price Inclusive of GPP = Original Selling Price + GPP

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 Example:
 Ahmad approaches the Islamic bank and applies for
financing under the concept of BBA. He wants to buy a
house with the purchase price of RM1,000,000 and
the profit rate the bank want to charge is 10 %. The
period of financing is 15 years and Ali has to repay the
selling price in 180 installments. The grace period are
2 years and profit rate during grace period is 5 %.

 How much is the monthly installment during and after

grace period, selling price based on CRR method and
the total profit of this financing?
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 BBA Financing Instalment using Constant
rate of return (CRR) with Grace Period
COMPONENT COMPUTATION DETAILS
FORMULA
Annuity Factor (AF) i(1+i)n i = 0.1/12 = 0.008333
(1+i)n -1 n = 180 payments
= 0.008333(1 + 0.008333)180 = 0.01074606
(1 + 0.008333)180 - 1
Periodic Repayment AF x Purchase price AF = 0.01074606
(PR) Purchase price = RM1,000,000
0.01074606 x RM1,000,000 = RM10,746.06
Selling Price PR x n PR = RM10,746.06
n = 180 payments
RM10,746.06 x 180 = RM1,934,291

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BBA Financing Installment using Constant
rate of return (CRR) with Grace Period
COMPONENT COMPUTATION DETAILS
FORMULA
Grace Period Profit (GPPR x PP x GPy) GPP Rate = 5%
(GPP) 2 PP = RM1,000,000
Gpy= 2 years
(0.05 x 1,000,000 x 2) = RM50,000
2
Installment During GPP/GPm GPP = RM50,000
Grace Period GPm = 2 x 12 = 24 months
RM50,000/24 = RM2,083.33
Selling Price Original Selling Price + GPP
RM1,934,291 + RM50,000 = RM1,984,291
Profit Amount Selling Price – Purchase Price

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COURT ISSUES ON BBA IMPLEMENTATION
 In 2009 the High Court of Malaysia ruled out that 10’s
defaulters of Bank Islam Malaysia Bhd (BIMB) BBA
contracts did not have to pay more than the original
financing amount. Thus depriving Bank Islam of the
profit arising from the transaction.
 Following that BIMB, appealed the case and on 31 March,
2009, Court of Appeal held that the BBA facility offered by
Islamic financial institutions is valid and legally binding.
 This decision was unanimously made by judges of the
Court of Appeal, namely Datuk Md Raus Sharif, Datuk
Abdul Hamid Embong and Datuk Ahmad Maarop, and the
decision reaffirmed that Bank Islam's practices in relation
to BBA contracts are Shariah-compliant and valid.
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COURT ISSUES ON BBA IMPLEMENTATION
 The Court of Appeal also reiterated that a BBA contract is a
sale transaction and therefore, it must not be compared to
a loan transaction. The unanimous decision of the Court
of Appeal would mean a certain relief to local Islamic
banks that had earlier feared a potential avalanche in
defaults of Islamic contracts, especially for home
financing.
 Current issues and problems with BBA arise from its
similarity to conventional practices explicitly based on
riba.
 Nevertheless, many of scholars as well as sincere
practitioners see it as ruses (hilah) to provide legal
justification for interest.
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SOME OTHER OBJECTION OF BBA
IMPLEMENTATION
1. Similarity with Interest Rate: One of the critics related to
the BBA contract is that it is very similar to the
conventional interest-based financing. It is said that, the
selling price of the BBA facility is similar to nominal
value of a loan plus the total interest payment. Some
would argue that it is the closest Islamic analogue to
interest finance. Comparing the characteristics of
Islamic or interest-free banks and conventional banks.
Some scholar concluded that, interest-free banks rely
heavily on the Murabahah method of finance which is
based on the use of a mark-up which does not differ
much from the interest charge. This again proves our
previous claim that these practices would lead to the
convergence of the Islamic banks into conventional
banks.
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SOME OTHER OBJECTION OF BBA
IMPLEMENTATION
2. Determination of the Price: The seller and buyer are at
liberty to agree at any price. Therefore, when performing
bai’ (sale), the seller can take into account different
factors, including the time of payment. However, this
can be done only at the time when the sale is taking place
and cannot be extended later in case of default by the
buyer. However, even though the penalties should not be
there in the Islamic banking system, yet Islamic banks
do charge penalties for the late payments and defaults.

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SOME OTHER OBJECTION OF BBA
IMPLEMENTATION
3. Use of the Interest Rate as a Benchmark: Islamic banks
and financial institutions commonly use LIBOR, COF,
BLR, BFR, KLIBOR etc as a benchmark, in order to
determine their profit margin. Using the interest rate is
considered undesirable - according to Usmani - but it
does not make the transaction invalid or haram, because
the contract in itself does not contain interest. However,
he thinks that this practice should be replaced with some
kind of Islamic benchmark.

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SOME OTHER OBJECTION OF BBA
IMPLEMENTATION
4. The Question of 'Iwad (Counter value): This is one of the
major objections related to the BBA facilities offered by
Islamic banks. It is believed that a valid sale must meet
some requirements, namely: there should be no
uncertainty (gharar) and the equivalent counter value
(‘iwad) should exist. There are three principal
components of 'iwad, namely: risk and liability (ghurm
and daman), work (amal) and capital (mal). This implies
that any sale conducted by Islamic bank must contain
'iwad for the profit to be considered legal. In other
words, a profit from a sale which does not contain 'iwad
is not a lawful profit. Islamic banks, in their financing
modes, should observe 'iwad and comprising of those
three principal components mentioned above (i.e.
ghurm and daman, amal and mal).
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SOME OTHER OBJECTION OF BBA
IMPLEMENTATION
However, in the case of BBA financing there is relatively
no trace of risk-taking and value addition.

5. Issue of Default: In the event of default, under a

conventional loan, a defaulter has to pay only the loan
amount plus accrued interest and other charges.
Moreover, the sum that the borrower has to pay is
limited to the period from the release of the loan until
full settlement thereof. Besides that, once the property
is disposed at market value, there is usually little that
the customer has to add. On the contrary, under the BBA
scheme, the bank claims the loan amount as well as the
profit margin thereon for the full tenure of the facility.
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SOME OTHER OBJECTION OF BBA
IMPLEMENTATION
Thus, the bank here claims a profit on the unexpired
tenure as well. Since the customer is to pay the full
amount for the full tenure, he should be allowed to
benefit for full tenure as' well. Likewise, the profit
charged for unearned tenure is against the principles of
BBA, and as such it cannot be considered as actual profit
and claimed under the BBA.

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 The End…..

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