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MURABAHA FINANCE

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FINANCE A PRESENTATION BY: MUHAMMAD TAYYAB RAZA Islamic Banking - ABN AMRO ... But ,It is prohibited by Sharia'h Standards to give Rebate to the client on early payment. – PowerPoint PPT presentation

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Title: MURABAHA FINANCE


1
MURABAHA FINANCE
  • A PRESENTATION BY
  • MUHAMMAD TAYYAB RAZA
  • Islamic Banking - ABN AMRO (Pakistan) Limited
  • At Specialized AlHuda CIBE Workshop at Avari
    Hotel

2
LEARNING OBJECTIVES
  • Conceptual understanding of Murabaha
  • Stages involved in Murabaha Transaction
  • Practical issues in Murabaha and their resolution
  • Murabaha Documentation
  • Uses of Murabaha as Mode of Finance (Local as
    well as import Murabaha)

3
DERIVATION OF MURABAHA
  • The word Murabaha has been derived from the
    Arabic word Ribah, which has literary meaning
    of profit.
  • The Murabaha can be denoted as Sale With Profit.

4
DEFINITION OF MURABAHA
  •  
  • Murabaha is a particular kind of sale where
    Seller expressly mentions the cost it has
    incurred on purchase of the Asset(s) to be sold
    and sells it to another person by adding some
    profit, which is known to Buyer.

5
WHAT IS SALE?
  • Sale is defined in the Islamic Fiqh as follows
  • Exchange of a thing(subject matter) of value
    with another thing of value, with mutual consent.

6
COMPONENTS OF VALID SALE
SALE
CONTRACT
SUBJECT MATTER
PRICE
POSSESSION
  • Offer/Acceptance
  • Buyer/Seller
  • Quantified
  • Certain
  • Physical
  • Constructive
  • Existence
  • Ownership
  • Possession
  • Valuable
  • Specific
  • Halal Purpose
  • Delivery
  • Instant and absolute
  • Unconditional

7
FEATURES OF MURABAHA
  • Murabaha finance is not a loan given on interest,
    it is a sale of Asset(s) for cash/deferred price.
  • It is the obligation of the Seller to disclose
    the Cost and Profit to the Buyer.

8
FEATURES OF MURABAHA
  • Murabaha Finance can only be used for the
    purchase of fresh Asset(s) only.
  • Buy-Back arrangement is prohibited. This means
    that Murabaha transaction cannot be executed for
    the Asset(s) already purchased by the Customer.

9
FEATURES OF MURABAHA
  • Murabaha Transaction can either be a cash sale
    (Spot Payment Murabaha) or a credit sale
    (Deferred Payment Murabaha) or a combination of
    both.
  • Payment of Murabaha Price can be made in lump sum
    or in installments or combination of both.

10
FEATURES OF MURABAHA
  • It is a fixed price sale and normally is done for
    short term.
  • The Murabaha Finance can be used to meet the
    working capital requirements. However, it cannot
    be used to meet the liquidity requirements.

11
  • VARIOUS
  • MODELS OF MURABAHA FINANCE

12
  • MODEL - I
  • TWO PARTY REALTIONSHIP
  • Bank Customer
  • MODEL - II
  • THREE PARTY RELATIONSHIP
  • (Bank-Vendor) and Customer
  • MODEL - III
  • THREE PARTY RELATIONSHIP
  • Bank and (Vendor-Customer)

13
MODEL - I
  • The simplest possible Model emerges when the
    transaction involves two parties only, i.e Bank
    and the Customer.
  • The Bank is also vendor and sells the Asset(s) to
    its Customers on deferred payment basis.
  • From Shariah perspective it is an ideal Model
    and its profits are fully justified because Bank
    assumes all risks as Vendor/Trader.

14
MODEL I GRAPHICAL PRESENTATION
2
1
Bank/Vendor
Customer
3
15
MODEL I - PHASES
  • Phase 1
  • The customer approaches Bank (Vendor) and
    identifies Asset(s) and collects relevant
    information including cost and profit.
  • Phase 2
  • Bank sells Asset(s) to the Customer, transfer
    risk and ownership to the Customer at certain
    Murabaha Price.
  • Phase 3
  • Customer pays Murabaha Price in lump sum or in
    installments on agreed dates.

16
MODEL - II
  • In most cases Murabaha Transaction involves a
    third party (i.e. Vendor) because Bank is not
    expected to engage in sale of variety of products
    required for variety of Customers.
  • The Bank directly deals with the Vendor and
    purchases the Asset(s).

17
MODEL II
  • The Bank sells the purchased Asset(s) to the
    customer on cost plus basis.
  • There are two distinct sale contracts at
    different point of times. First between Bank and
    Vendor and second between Bank and the Customer.

18
MODEL II GRAPHICAL PRESENTATION
3
1
4
Vendor
5
2
6
Customer
Bank
19
MODEL II - PHASES
  • Phase 1
  • Customer identifies and approaches the Vendor or
    Supplier of the Asset(s) and collects all
    relevant information.
  • Phase 2
  • Customer approaches the Bank for Murabaha
    Financing and promises to buy the Asset(s).
  • Phase 3
  • The Bank makes payment to vendor directly.

20
MODEL II PHASES
  • Phase 4
  • Vendor delivers the Asset(s) transfers the
    ownership of Asset(s) to the Bank.
  • Phase 5
  • Bank sells the Asset(s) to Customer on cost plus
    basis and transfers ownership.
  • Phase 6
  • Customer pays Murabaha Price in lump sum or in
    installments on agreed dates.

21
MODEL III BANKING MURABAHA
  • This Murabaha Model is mostly practiced model in
    Banking now a days and therefore we will look at
    it in more detail.
  • We will also look at the documentation required
    at different stages of the transaction.
  • It is also a three-party structure but it is bit
    complicated than previous ones.

22
MODEL III BANKING MURABAHA
  • The product of Murabaha that is being used in
    Islamic Banking as a mode of finance is something
    different from the Murabaha used in normal trade
    .
  • It is called Murabaha to the Purchase Orderer .

23
MODEL III BANKING MURABAHA
  • 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.

24
MODEL III GRAPHICAL PRESENTAION
3
4
Vendor
5
5
2
6
Bank
Offer
Acceptance
Customer
1
7
25
PHASE I PROMISE TO PURCHASE AND SELL
  • The Customer approaches the Bank for Murabaha
    Finance and promises to purchase the Asset(s)
    from the Bank which, the Customer will purchase
    as an Agent of the Bank.
  • Master Murabaha Finance Agreement (MMFA) shall be
    signed by the Bank and the Customer at this
    stage. This is basically a Memorandum of
    Understanding between two parties.

26
PHASE II APPOINTMENT OF AGENT
  • In the absence of expertise required to purchase
    particular kind of Asset(s), the Bank appoints
    Customer as its Agent to buy Asset(s) on its
    behalf
  • Types of Agency Agreement

ON ASSET BASIS
ON TIME BASIS
  • Global Agency
  • Specific Agency
  • Limited Period
  • Open Ended

27
PHASE II APPOINTMENT OF AGENT
  • The appointment of an Agent for purchase of
    Asset(s) for and on behalf of the Bank and the
    ultimate sale of such Asset(s) to the Customer
    shall be independent transactions of each other
    and separately documented.
  • However, according to Shariah perspective, it is
    preferable to appoint the Agent other than the
    Customer.

28
PHASE II APPOINTMENT OF AGENT
  • Agency Agreement is not the condition of the
    Murabaha if the institution can make direct
    purchases from the supplier.
  • It is advisable to execute Agency Agreement
    because financial institution does not have the
    expertise to identify the Asset(s) and negotiate
    an efficient price.

29
PHASE II DOCUMENTATION
  • AGENCY AGREEMENT
  • This agreement must contain
  • Types (Global/Specific)
  • Description of Asset(s) to be purchased
  • Mode of Disbursement of Funds
  • Roles and Responsibilities of Agent
  • THIS DOCUMENTS MUST BE SIGNED BEFORE PURCAHSE OF
    ASSET(S) BY THE AGENT

30
PHASE III IV PURCHAHSE OF ASSETS BY AGENT
  • The Customer identifies the Vendor, selects the
    Asset(s) on behalf of the Bank and advice its
    particulars, including the Vendors name and
    purchase price to the Bank.
  • If the supplier is nominated by the Customer
    itself, guarantee for good performance can be
    demanded from the Customer.

31
PHASE III IV PURCHAHSE OF ASSETS BY AGENT
  • The Customer takes possession of the Asset(s) as
    an Agent of the Bank.
  • It is the obligation of the Customer(Agent) to
    ensure, at this stage, that Asset(s) supplied is
    in accordance with the given specifications.
  • To ensure that a fresh Asset(s) are purchased by
    the Agent, Banks staff should verify actual
    purchase of Asset(s).

32
PHASE III IVDOCUMENTATION
  • DECLARATION FROM CUSTOMER (AGENT)
  • The Customer (Agent) will inform the Bank,
    through this document, that it has taken the
    possession of Asset(s) on behalf of the Bank.
  • This Transactional Document shall be an integral
    part of Master Murabaha Financing Agreement
    (MMFA).
  • This declaration must contain the statement that
    Customer has inspected the Asset(s) to ensure
    that its appropriateness and suitability to the
    customer.

33
Phase V DISBURSEMENT OF FUNDS / PAYMENT TO VENDOR
  • The Bank has two options regarding for payment of
    Purchase Price of Asset(s) bought by Agent on its
    behalf.
  • Direct payment to Vendor by the Bank
    (preferable).
  • Disbursement of Funds to Agents (Customers)
    account for onward payment to Vendor through
    Cross Cheque/Pay Order/Demand Draft etc.

34
PHASE V - DOCUMENTATION
  • LETTER OF DISBURSEMENT
  • This documents is request from Customer to
    disburse funds for payment to Vendor.
  • The disbursement of funds to the Customer shall
    be treated as Advance Against Murabaha.

35
PHASE VI MURABAHA EXECUTION STAGE (OFFER AND
ACCEPTANCE)
  • The Customer offers to buy the Asset(s) from the
    Bank which it has purchased as an Agent of the
    Bank.
  • The Bank gives the Acceptance to the Customers
    Offer.
  • THIS IS THE POINT WHERE THE MURABAHA COMES IN TO
    EXISTENCE.

36
PHASE VI MURABAHA EXECUTION STAGE (OFFER AND
ACCEPTANCE)
  • It is obligatory that the point when the risk of
    the Asset(s) is passed on by the Bank to the
    customer be clearly identified.
  • It is mandatory to determine the Murabaha Price
    at this stage, otherwise Murabaha shall not be
    valid.
  • It is also mandatory to determine the date of
    payment of Murabaha Price rendering the Murabaha
    to be valid.

37
PHASE VI MURABAHA EXECUTION STAGE DOCUMENTATION
  • OFFER FOR PURCHASE
  • The Customer offers to buy the Asset(s) purchased
    by it as an Agent.
  • This documents should be signed after actual
    possession of Asset(s) by the Customer but before
    consumption of such Asset(s).
  • This Transactional Document shall be an integral
    part of Master Murabaha Financing Agreement
    (MMFA).

38
PHASE VI MURABAHA EXECUTION STAGE DOCUMENTATION
  • BANKS ACCEPTANCE OF OFFER
  • Bank accepts the Customers offer and sells the
    Asset(s) purchased by Customer(Agent) on its
    behalf on Murabaha Price to be paid on agreed
    future date.
  • The Asset(s) must be in Banks possession by
    either way, i.e. physical or constructive.

39
PHASE VI MURABAHA EXECUTION STAGE DOCUMENTATION
  • This document must contain
  • Murabaha Price (CostProfit)
  • Repayment Date

40
PHASE VI MURABAHA EXECUTION STAGE DOCUMENTATION
  • PAYMENT SHEDULE SUMMARY
  • The customer has three options to pay the
    Murabaha Price.
  • Lump-sum payment
  • Installment Payment
  • Partly instant and partly in installment
  • This documents is required if the Customer wishes
    to pay the Murabaha Price in installments

41
PHASE VI MURABAHA EXECUTION STAGE DOCUMENTATION
  • DEMAND PROMISSORY NOTE
  • After execution of Murabaha, the Murabaha Price
    will become the Debt (Dyan) on the Customer.
  • This document is Customers acknowledgement to
    the debt amount and its promise to pay the debt.

42
PHASE VII PAYMENT OF MURABAHA PRICE BY CUSTOMER
  • Customer will pay the Murabaha Price to the Bank
    on the agreed date.
  • The customer is not entitled to any reduction in
    Murabaha price in case of early payment of
    Murabaha Price.
  • In same way Bank can not increase the Murabaha
    Price if the Customer defaults or make delayed
    payment.

43
SECURITIES IN MURABAHA
  • The institution may ask the customer to furnish a
    security to its satisfaction for prompt payment
    of the Deferred Murabaha price.
  • It is also permissible that the sold Asset(s)
    itself is given to the seller as a security.
  • It is preferable not to take Interest bearing
    instruments as securities.

44
SECURITIES IN MURABAHA
  • Bank can obtain any of the following security
    from its Customer client depending upon the
    nature of credit facility, amount of facility and
    credibility of the customer.
  • HYPOTHECATION OF ASSETS
  • PLEDGE OF GOODS AND/OR MARKETABLE SECURITIES.
  • LIEN ON DEPOSITS.
  • MORTGAGE ON IMMOVABLE PROPERTIES.
  • BANK GUARANTEES.
  • PERSONEL GUARANTEES.

45
MURABAHA IN FOREIGN TRADE
Murabaha
Import Murabaha
Export Murabaha
Pre-shipment
Post-shipment
46
USE OF MURABAHA IN IMPORTS
  • Agency Agreement must be signed before opening of
    L/C in case of imports.
  • All costs/charges (e.g SWIFT charges, L/C Opening
    commission) shall be included in the cost of
    Murabaha Asset.
  • Offer and Acceptance may be signed when the
    Asset(s) arrived at port.
  • In case of Usance L/C, Murabaha execution stage
    is offer and Acceptance stage even though the
    payment is made after usance period.

47
USE OF MURABAHA IN EXPORTS
  • In case of Pre-shipment, normal procedure as
    adopted in local Murabaha shall be strictly
    followed.
  • In case of post-shipment, Murabaha can not be
    executed for goods already exported. However,
    Murabaha can be executed for fresh purchases
    required for next shipment against assignment of
    receivables for first shipment.

48
  • PRACTICAL
  • ISSUES
  • IN MURABAHA

49
Discount On Acquisition Of Assets
  • Discounts from supplier (If any) would be passed
    on to the customer at the time of Murabaha Sale
    by reducing the cost of sales.

50
Rise in Prices of Asset(s)
  • If there is a rise in prices and the amount
    escalates for which financing is availed then the
    transaction can only be executed if the Bank has
    been informed and the Bank subsequently accepts
    the same.
  • The institution reserves the right to reject the
    purchases if made other then agreed price.

51
Change of Asset(s)
  • Change of Asset(s) in the agency agreement can be
    done with mutual consent.
  • If Agency Agreement is for specific Asset(s) then
    new agreement is required for changed Asset(s).

52
Delay in Supply from the Supplier
  • Delay in Supply from the supplier in case where
    specific time was allowed leads to the revocation
    of agency agreement. In such cases the customer
    will refund the cost of goods.

53
Rebate in Early Payment
  • If the customer makes early payment and there is
    no commitment from the institution in respect of
    any discount in the price of Murabaha, than the
    institution has the sole discretion in allowing
    them the rebate.
  • But ,It is prohibited by Sharia'h Standards to
    give Rebate to the client on early payment. Under
    Murabaha the price is fixed, therefore, it is
    recommended that issue should be brought in the
    knowledge of Sharia'h advisor

54
Rollover in Murabaha
  • Rollover is also not allowed.
  • Rollover in a Murabaha Transaction would imply
    that payment of earlier Murabaha Price by
    executing new Murabaha.

55
Partial Murabaha
  • At times Customer may require partial financing
    for its shipment.
  • In this case the share of Seller (Bank) should be
    mentioned on the invoice and that share should be
    separately kept to facilitate the verification by
    Banks officer.

56
Murabaha with Related Parties
  • In case of Murabaha, the Vendor and the Customer
    must be independent to each other.
  • Banks are not allowed to enter into a Murabaha
    Transaction where Vendor and Customer are
    associated parties.
  • Parties are considered to be related parties if
    one party has 33 or more shares/ownership in the
    business of other party.

57
  • JAZAKUM UALLAH
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