What is Murabahah?
Murabahah is a contract wherein the Islamic Bank, upon request by the customer, purchases the asset from a third party supplier/vendor and resells it to the customer either against immediate payment or on a deferred payment basis. Basically Murabaha financing is the sale of goods at cost plus an agreed profit.
Stages of Murabaha Contract:
1. Promise Stage,
2. Agency Stage,
3. Acquiring Possession, and,
- Once the customer purchases the goods the risk of the goods transfers to the Bank. Bank can now sell these goods to the customer.
- Please note that the customer play two different roles in this transaction. One that of Bank’s agent and other of purchaser. These roles should be clearly segregated to make the transaction Halal.
Acquisition of Title & Possession of the Asset:
- Institution must take constructive or actual possession of the product being sold.
- Goods must exist at the time of execution of Murabaha contract.
Murabaha financing cannot be executed if the above two conditions are not fulfilled.
Basic Rules of Murabaha Financing:
Conditions of Subject Matter:
- Item must exists and must be in the ownership of the seller.
- Subject Matter of Murabaha financing must be in the physical or constructive possession of the seller (transfer of risk and reward and permission of use/Tasarruf).
- The subject of sale must be a property, of a value.
- Subject of Murabaha contract should not be a thing which is not used except for a Haram Purpose.
- The subject matter of Murabaha agreement must be specifically known and identified to the buyer.
- The delivery of subject matter must be certain and should not depend on chance.
- The subject matter in murabahah (such as murabaha mortgage or commodity murabahah) must be tangible goods and commodities.
- The exact cost of subject matter can be ascertained.
- The subject matter is purchased by a third party.
There are four types of conditions:
- Condition which is the requirement of sale (Valid).
- Reasonable condition for the safety of Subject mater (Valid).
- Unreasonable condition but in accordance with normal market practice (Valid).
- Condition which is Against the requirement of sale, Not in accordance with the market practice Beneficial for the seller or purchaser (void).
Price of Murabaha:
- The price must be certain in Murabaha contract. (lump sum/by percentage).
- The price in Murabaha financing may be deferred or on spot.
- If the price deferred in Murabaha agreement, the installments and due date must be determined.
- When the price is fixed it cannot be decreased incase of earlier payment.
- When the price is fixed it cannot be increased incase of default.
- Fluctuation in commodity murabahah price is not permissible. However, use of benchmark at the time of Master Financing Agreement is permissible.
Expenses of Murabahah:
The expenses incurred by the seller directly in acquiring the commodity like freight and custom duty can be included in the cost price.
Murabahah as a mode of Financing:
Murabahah, which is used as a mode of financing in Islamic banks, is a package of the following different contracts:
- Master financing agreement between bank and customer.
- Undertaking from client.
- Agency agreement between bank and customer.
- Purchase of goods from supplier.
- Murabahah agreement between bank and client.
- The sequence between 3, 4 & 5 is extremely important.
The Murabahah, its mechanism, accounting standards, shariah standards and its designing is discussed in more details during the Islamic finance certification, Islamic banking courses, master in Islamic finance and PhD Islamic finance programs, offered by AIMS’ Islamic finance institute.