Center of Islamic Finance COMSATS Institute of Information Technology Lahore Campus 1 Adopted from open source lecture of Mufti Najeeb Khan.

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 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. 3

Murabaha is a particular kind of sale where the seller discloses its cost and profit charged thereon. Musawima is a sale on agreed price without referring to the first price on which the seller has purchased. 4

 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. 5

 It is called Murabaha to the purchase orderer.  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. 6

 As it is a kind of sale, there must be a seller and buyer and some thing 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 needs of the client. 7

 It is a fixed price sale and normally is done for short term.  The transaction can be used in order to meet the working capital requirements however it cannot be used to meet liquidity requirements. 8

9 Step by Step Murabaha

 Stage One (a) for Murabaha financing. Client approach the bank for facility through Murabaha. Facility approved Bank Client 10

 Stage One (b) for Murabaha financing. Client and bank sign an agreement to enter into Murabaha. Murabaha Facility Agreement MOU Bank Client 11

 Stage One (c) for Murabaha financing. Client submit the purchase requisition to the bank. purchase requisition /Promise to the bank. Bank Client 12

 Stage Two (a) for Murabaha financing. Client appointed as agent to purchase goods on bank’s behalf BankClient Agreement to Murabaha Agency Agreement 13

 Stage Two (b) for Murabaha financing. Bank gives money to supplier through client’s account for purchase of goods. Agency Agreement Islamic Bank Bank Client Agreement to Murabaha Disbursement to the Supplier 14

 Stage three for Murabaha financing. Client purchases goods on bank’s behalf and takes their possession. Client purchases goods and takes possession Transfer of Risk Vendor Banck Client 15

 Stage four (a) for Murabaha financing. Client makes an offer to purchase the goods from bank. Bank Offer to purchase Client 16

 Stage four (b) for Murabaha financing. Bank accepts the offer and sale is concluded. Murabaha Agreement + Transfer of Title Bank Client 17

 Stage four (b) for Murabaha financing. Client pays agreed price to bank according to an agreed schedule. Usually on a deferred payment basis (Bai Muajjal ). BankClient Payment of Price 18

V ENO Agreement C USTOMER I SLAMIC B ANK V ENDOR 19

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. 20

 Rescheduling is allowed but repricing is not allowed.  Rollover is also not allowed. 21

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Risk Dimensions Banking Risks Credit LiquidityPrising riskMarketForeign ExchangeSolvencyOperational Islamic Banks also face -Additional asset risk -Greater fiduciary risks -Greater legal risk Islamic Banks also face -Additional asset risk -Greater fiduciary risks -Greater legal risk 23

THANK YOU 24