Foreign Exchange

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192 Ahmad Block, New Garden Town, Lahore -
Pakistan. Ph (92-42) 35913096 - 98, Fax (92-42)
35913056 Email info_at_alhudacibe.com
www.alhudacibe.com
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Murabahah Abdul Samad AlHuda CIBE
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Presentation Outline

• This module will highlight the following aspects
  of Murabaha
• Step by Step Murabaha Financing
• Documentation
• Profit Calculation
• Issues
• Conclusion

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Murabaha - Definition /Introduction

• In literary terms Bay Murabaha means sale on
  profit
• 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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MFI Murabaha

• The product of Murabaha that is being used in MFI
  MFIing as a mode of finance is something
  different from the Murabaha used in normal trade.
• This transaction is concluded with a prior
  promise to buy, submitted by a person interested
  in acquiring good through the institution.

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MFI Murabaha

• It is a contract wherein the institution, upon
  request by the customer, purchases an 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. 
• It is called Murabaha to the purchase order.
• It is a bunch of contracts completed in steps and
  ultimately meet the financial needs of the
  client.

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Scope of Murabaha

•   As it is a kind of sale, there must be a seller
  and buyer and something 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 need of the client.
• It is fixed price sale and normally is done for
  short term.
• The transaction can be used in order to meet
  the working capital requirement however it cannot
  be used to meet liquidity requirements.

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Step by Step Murabaha Financing

• Client and MFI sign an Agreement to enter
  into Murabaha (MMFA).

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Step by step Murabaha Financing

• Client appointed as Agent to purchase goods on
  MFIs behalf. In this case, the concerned branch
  Manager will explain the appointment of client as
  an Agent, which will be checked by the Shariah
  Advisor.

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Step by step Murabaha Financing

• MFI gives money to agent/supplier for purchase of
  goods.

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Step by Step Murabaha Financing

• The agent takes possession of goods on MFIs
  behalf.

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Step by Step Murabaha Financing

• Client makes an offer to purchase the goods
  from MFI through a declaration.

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Step by step Murabaha Financing

• MFI accepts the offer and sale is concluded.

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Step by step Murabaha Financing

• Client pays agreed price to MFI according to an
  agreed schedule. Usually on a deferred payment
  basis (Bai Muajjal)

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Steps Of MFI Murabaha
MOU ? Order Form ? Agency Agreement ? Purchase
? Payment of Purchase Price? ? Possession ? Offer
and Acceptance (Declaration) ? Payment of
Murabaha Price

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Murabaha Documentations

• There are a number of documents involved in a
  Murabaha financing transaction. The most
  essential of these documents are
• Master Murabaha Facility Agreement
• Agency Agreement
• Order Form
• Description of assets
• Declaration
• Summary Payment Schedule

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• ISSUES RELATED TO MURABAHA

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Issues Related To Murabaha
Issue Filling/Signing of All Documents Simultaneously In certain transactions, the MFI obtained the complete set of signed Murabaha transaction documents from the customer before actual execution of transaction. Solution Shariah Compliance officer should physically check such irregularity leads to non-compliance of the transaction.
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EVIDENCE OF PURCHASE
Issue In certain transactions MFIs do not obtains sufficient/appropriate evidences of purchase and delivery of goods. Due to certain reasons the MFI makes purchases in the name of the customer and the invoices and other title documents are in the name of the customer. Solution The MFI should perform some alternative procedures in order to conform the bonafides of the execution of transaction. e.g. To obtain Gate pass, Weighbridge slips Stock record etc. It is recommended that in such cases of Murabaha, the MFI should make payment directly to the suppliers and physical surveys of the goods should be performed on a test basis. Evidence of receipt of goods should also be obtained.
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PHYSICAL VERIFICATION OF GOOD
ISSUE 3. Generally the MFI takes the constructive possession, while the customer actually receives the delivery of the goods. There is risk that Murabaha transaction may be executed prior to the procurement of goods, which will render the Murabaha transaction as being mere financing rather than trading. Solution Keeping in view the issue physical surveys of the goods should be performed on a test basis. As an alternate, evidence of receipt of goods including third party evidence should be ensured.
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DELAYED DECLARATIION
Issue In certain transactions MFIs receive declaration of the purchased goods after significant delay. So there is risk that goods might already have been used/sold by the customer. Solution Murabaha transaction should be executed as soon the goods purchased by the customer.
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ABSENCE OF DATES ON DECLARATION INVISES
Issue Absence of date on invoices and declaration may arise a question with regard to the permissibility or otherwise of the Murabaha sate transaction. Solution No invoices with out date shall be accepted and the management should remain vigilant to avoid such weaknesses.
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DIFFRENCE IN QUANTITIES
Issue Difference in quantities of commodity being purchased under Murabaha as per Declaration and the invoices creates a conflict within Murabaha documentation. Solution The quantities as per Declaration should be similar to that of invoices presented unless a transaction involves joint purchases with customer. Where transaction involves joint purchases, the client must give a letter inducting clearly the amount purchased for himself. Purchases of shares are a good example of such case.
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DISCOUNTS IN MURABAHA
Issue It is a general practice, e.g. in Pharmaceutical industry that discounts are awarded to the suppliers at the end of the year. The MFI generally do not claim any discounts in this regards at the end of the year. Solution The MFI should ensure discounts (if any) available from supplier should be transferred to it.

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REBATE
Issue In certain cases the MFI promises to gives rebate to the customer if the customer settles the transaction before the actual repayment date. Solution The MFI should not agree to give rebate to the clients in the beginning of transaction and in every case of rebate, MFI should refer to Shariah Advisor.
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PRICING IN MURABAHA
Issue In most of the cases of import Murabaha, the MFIs do not consider custom duty, LC charges etc in their pricing mechanism and the customer borne all these charges. Solution These charges related to the ownership of the asset and should be borne by the MFI instead of the customer. The MFI may add these charges in the cost of Murabaha asset.
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192 Ahmad Block, New Garden Town, Lahore -
Pakistan. Ph (92-42) 35913096 - 98, Fax (92-42)
35913056 Email info_at_alhudacibe.com
www.alhudacibe.com