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Mudarbah

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Hadia Sohail
Hadia Sohail

This document defines and outlines the concept of Murabaha, which is a form of Islamic financing that involves the sale of goods at a profit agreed upon by both parties. It discusses the key conditions for a valid Murabaha transaction, including full disclosure of costs and profits. It also covers various types of Murabaha, potential issues, prohibited elements, and the documentation required.

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MUDARABAHAH
OUTLINE Definition Conditions of Murabaha Basic features of Murabahah Shariah issues related to Murabahah The prohibited elements in Murabahah Types of Murabahah Mechanism of Murabahah Documentations
Murabaha Its is a type of contract, which is considered as a form of sale, where the seller expressly mentions the cost of the sold commodity, and sells it to another person by adding profit. Murabahah financing and cost plus or mark up price is one of the financing mechanisms in the muamalat system
Murabahah The word murabahah is derived from the word ribh means profit or gain. If a person sells a commodity for a lump sum price or installment basis without reference to the cost, this is not murabahah Even though he is earning some profit but it is not bases on cost plus profit so this is called musawamah
Definition Ibn al-Humams definition. Al-Murabaha is a contract of delivery of traded goods by a seller to the buyer by offering the buyer the selling cost plus profit
Conditions The subject matter of the product should be define clearly even the quantity, type and description The act of concealing the cost price and the profit earned murabaha transaction without customer knowledge will be rendered and transaction will be null and void. The seller has obligation to supply the product to the customer, and his obligation is to pay the amount according to the agreed terms Both parties should be adult ,rational ,intelligent and can be held accountable The contract is based on offer and acceptance
Conditions The buyer must know about the price at which the seller obtained the object of sale, Knowledge of the profit margin The original price is fungible. The price at which the seller obtained the goods must be measured by weight, volume or number of homogenous goods. If the seller is not the owner the murabaha is not permitted No riba trading should involve The traded item or property must be lawfully owned by the seller according to shariah
Practical steps of Murabaha The client and the institution sign a master agreement whereby the institution promises to sell and the client promises to buy the commodities on an agreed ratio of profit added When a specific commodity is required by the customer the institution appoints the client as his agent for purchasing the commodity on its behalf, and an agreement of agency is signed by both parties. The client purchases the commodity on behalf of the institution and takes possession as an agent of the institution
Practical steps of Murabaha The client informs the institution that he has purchased the commodity on his behalf, and at the same time, makes an offer to purchase it from the institution. The institution accepts the offer and the sale is concluded whereby the ownership as well as the risk of the commodity is transferred to the client The bank cannot enter into a actual sale at the time when the client seeks murabahah financing from him
Shariah Issues Institutes offer financing by using LIBOR a bench mark to calculate there profit or mark up. This has been pointed out that this benchmark should be prohibited like interest and profit should not be taken by using this.
Securities Against Murabaha Seller cannot ask for securities unless he has sold the product to the client and the price is due. Guaranteeing The Murabahah There is no compulsion of guarantee in Murabaha it is a voluntary transaction and no fee can be charge on a guarantee There client should agree that in case of defaults in payments at the due date, he would pay a specified amount to a charitable fund maintained by the bank.
Shariah Issues There is no concept of roll over in murabahah. The transactions cannot be rolled over for a further period. Rebate on Early payment Some scholars allow it, if a person want to pay early so he can ask for discount. But many scholars dont allow this. Rescheduling of payment You can reschedule the payment but cannot charge more money on it that is interest.
The prohibited elements in Murabahah It can not be used on all financing offered by conventional banks. Some financial institutes are using murabahah for financing overhead expenses, salary purposes and others. But murabahah can not be used like this. It can only be used only where a commodity is intended to be purchased by the customer. Sometimes clients sign the murabahah documents just for funds and write any product which they do not intend to use. So financer should confirm that the client is getting funds for the right purpose.
The prohibited elements in Murabahah Sale of commodity to the client is effected before the commodity is acquired from the supplier. This is wrong there should be documents in every stage of Murabahah contract Entering into a murabahah contract on commodities already purchased by their clients from a third part. It is wrong. When the commodity is bought by the client it cannot be purchased against from the same supplier
Types of Murabaha Order and Promise If the purchaser accepts the request of the orderer , he should purchase the asset and conclude a valid sale contract between him and the vendor of the asset. The purchaser offers the asset to the ordered who should accept it by virtue of the juristically binding mutual promise and should accordingly establish a sale contract.
Types of Murabaha Murabahah to the purchase orderer without an obligation In this type of murabaha one of the parties(the purchase orderer) asks the other party (purchaser) to purchase an asset and promises that when the latter purchases the asset, the orderer would purchase it fro him at a price including mark up profit thereon.
General rules regarding Murabahah to the purchase ordered The Guarantee The creditor (purchaser) may ask the debtor (purchase orderer) to provide him with a guarantee. The debtor should in this case submit an acceptable guarantee. The ordered goods may be one of the acceptable guarantees for payment of the debt.
Debts under Murabaha to the purchase orderer According to Sharia rules, the settlement of debts under murabahah to the purchase orderer should not be connected to the disposition of the goods sold, whether the result of the sale is negative and positive. This is because when the sale is completed, the title is transferred to the orderer and the original purchaser holds title to the receivable.
Mechanism of Murabahah Letter of edit based on Murabahah: In this application of murabahah, the customer requests the bank to open a letter of credit to import goods from abroad through an application enclosing a pro-forma invoice and providing all the necessary details and information.After securing the necessary gurantee and scrutinising the application, the bank
Sale and purchase of goods Upon receipt of purchase of goods by the institution, directly or through an agent, from the supplier the goods shall be at the risk and cost of the institution until such time that these goods are sold to the client, to be evidenced by the acceptance, duly signed and endorsed the institution.
Documentation Sale and purchase of goods Security Fees and expenses Payment of contract price Events of default Penalty Indemnities
Mudarbah

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Mudarbah

  • 2. OUTLINE Definition Conditions of Murabaha Basic features of Murabahah Shariah issues related to Murabahah The prohibited elements in Murabahah Types of Murabahah Mechanism of Murabahah Documentations
  • 3. Murabaha Its is a type of contract, which is considered as a form of sale, where the seller expressly mentions the cost of the sold commodity, and sells it to another person by adding profit. Murabahah financing and cost plus or mark up price is one of the financing mechanisms in the muamalat system
  • 4. Murabahah The word murabahah is derived from the word ribh means profit or gain. If a person sells a commodity for a lump sum price or installment basis without reference to the cost, this is not murabahah Even though he is earning some profit but it is not bases on cost plus profit so this is called musawamah
  • 5. Definition Ibn al-Humams definition. Al-Murabaha is a contract of delivery of traded goods by a seller to the buyer by offering the buyer the selling cost plus profit
  • 6. Conditions The subject matter of the product should be define clearly even the quantity, type and description The act of concealing the cost price and the profit earned murabaha transaction without customer knowledge will be rendered and transaction will be null and void. The seller has obligation to supply the product to the customer, and his obligation is to pay the amount according to the agreed terms Both parties should be adult ,rational ,intelligent and can be held accountable The contract is based on offer and acceptance
  • 7. Conditions The buyer must know about the price at which the seller obtained the object of sale, Knowledge of the profit margin The original price is fungible. The price at which the seller obtained the goods must be measured by weight, volume or number of homogenous goods. If the seller is not the owner the murabaha is not permitted No riba trading should involve The traded item or property must be lawfully owned by the seller according to shariah
  • 8. Practical steps of Murabaha The client and the institution sign a master agreement whereby the institution promises to sell and the client promises to buy the commodities on an agreed ratio of profit added When a specific commodity is required by the customer the institution appoints the client as his agent for purchasing the commodity on its behalf, and an agreement of agency is signed by both parties. The client purchases the commodity on behalf of the institution and takes possession as an agent of the institution
  • 9. Practical steps of Murabaha The client informs the institution that he has purchased the commodity on his behalf, and at the same time, makes an offer to purchase it from the institution. The institution accepts the offer and the sale is concluded whereby the ownership as well as the risk of the commodity is transferred to the client The bank cannot enter into a actual sale at the time when the client seeks murabahah financing from him
  • 10. Shariah Issues Institutes offer financing by using LIBOR a bench mark to calculate there profit or mark up. This has been pointed out that this benchmark should be prohibited like interest and profit should not be taken by using this.
  • 11. Securities Against Murabaha Seller cannot ask for securities unless he has sold the product to the client and the price is due. Guaranteeing The Murabahah There is no compulsion of guarantee in Murabaha it is a voluntary transaction and no fee can be charge on a guarantee There client should agree that in case of defaults in payments at the due date, he would pay a specified amount to a charitable fund maintained by the bank.
  • 12. Shariah Issues There is no concept of roll over in murabahah. The transactions cannot be rolled over for a further period. Rebate on Early payment Some scholars allow it, if a person want to pay early so he can ask for discount. But many scholars dont allow this. Rescheduling of payment You can reschedule the payment but cannot charge more money on it that is interest.
  • 13. The prohibited elements in Murabahah It can not be used on all financing offered by conventional banks. Some financial institutes are using murabahah for financing overhead expenses, salary purposes and others. But murabahah can not be used like this. It can only be used only where a commodity is intended to be purchased by the customer. Sometimes clients sign the murabahah documents just for funds and write any product which they do not intend to use. So financer should confirm that the client is getting funds for the right purpose.
  • 14. The prohibited elements in Murabahah Sale of commodity to the client is effected before the commodity is acquired from the supplier. This is wrong there should be documents in every stage of Murabahah contract Entering into a murabahah contract on commodities already purchased by their clients from a third part. It is wrong. When the commodity is bought by the client it cannot be purchased against from the same supplier
  • 15. Types of Murabaha Order and Promise If the purchaser accepts the request of the orderer , he should purchase the asset and conclude a valid sale contract between him and the vendor of the asset. The purchaser offers the asset to the ordered who should accept it by virtue of the juristically binding mutual promise and should accordingly establish a sale contract.
  • 16. Types of Murabaha Murabahah to the purchase orderer without an obligation In this type of murabaha one of the parties(the purchase orderer) asks the other party (purchaser) to purchase an asset and promises that when the latter purchases the asset, the orderer would purchase it fro him at a price including mark up profit thereon.
  • 17. General rules regarding Murabahah to the purchase ordered The Guarantee The creditor (purchaser) may ask the debtor (purchase orderer) to provide him with a guarantee. The debtor should in this case submit an acceptable guarantee. The ordered goods may be one of the acceptable guarantees for payment of the debt.
  • 18. Debts under Murabaha to the purchase orderer According to Sharia rules, the settlement of debts under murabahah to the purchase orderer should not be connected to the disposition of the goods sold, whether the result of the sale is negative and positive. This is because when the sale is completed, the title is transferred to the orderer and the original purchaser holds title to the receivable.
  • 19. Mechanism of Murabahah Letter of edit based on Murabahah: In this application of murabahah, the customer requests the bank to open a letter of credit to import goods from abroad through an application enclosing a pro-forma invoice and providing all the necessary details and information.After securing the necessary gurantee and scrutinising the application, the bank
  • 20. Sale and purchase of goods Upon receipt of purchase of goods by the institution, directly or through an agent, from the supplier the goods shall be at the risk and cost of the institution until such time that these goods are sold to the client, to be evidenced by the acceptance, duly signed and endorsed the institution.
  • 21. Documentation Sale and purchase of goods Security Fees and expenses Payment of contract price Events of default Penalty Indemnities