Sale Contract /Murabaha . Muhammad Najeeb Khan

CONTRACT IN ISLAM CONTRACT SUBJECT MATTER WORDING OF CONTRACT CONTRACTORS Non-restricted Sane Mature Present Unconditional Non-contingent Specified Quantified

Law of Contract Islamic Contract: It is connection between the offer and the acceptance in a manner that results the proper affects. Offer Acceptance Subject matter

ISLAMIC SALE DEFINITION OF SALE(BAI) NIBAF SALE CONTRACT ISLAMIC SALE DEFINITION OF SALE(BAI) exchange of a thing of value with another thing of value with mutual consent. the sale of a commodity in exchange of cash.

ISLAMIC SALE (1)-VALID SALE ( Bai Sahih) NIBAF SALE CONTRACT ISLAMIC SALE (1)-VALID SALE ( Bai Sahih) a sale is valid if all elements together with their conditions are present elements of valid sale are Contract ( Aqd ) Subject matter ( Mabe’e) Price ( Thaman ) Possession or delivery ( Qabza )

CONTRACT ( Aqd ) Offer & Acceptance ( Ijab-o-Qobool) Oral ( Qauli ) NIBAF SALE CONTRACT CONTRACT ( Aqd ) Offer & Acceptance ( Ijab-o-Qobool) Oral ( Qauli ) Implied ( hukmi ) Buyer and seller ( Muta’aquadeen ) must be Sane Mature Conditions of contract ( Sharaet-e-Aqd ) sale must be non-contingent sale must be immediate Contract or transaction (Aqd) 1.1Offer & acceptance (Ijab-o-Qobool): The term “Offer” means that one person proposes to either sell his commodity to another person or buy from him and “Acceptance” means that the person who has been offered gives his approval of the proposal. Offer and acceptance are always done in past tense eg. “I have sold” or “I have purchased” etc. There are two ways of doing it: 1.1.1 Oral (Qauli): By saying. 1.1.2 Implied (Isharaa): By indicating. This is of two types: 1.1.1(a) Credit Sale (Istijrar) for eg. settlement of the bill at the end of the month. 1.1.1(b) Hand-to-Hand Sale (Taati): Exchange of money with goods without uttering Ijab-o-Qobool for eg. procedure adopted in contemporary stores. 1.2 Buyer & seller (Muta’aquadeen): Both must be : 1.2.1 Sane : Should be mentally sound at the time of contract. Mature : Should be adult, however, if minor, must understand

SOLD GOOD OR SUBJECT MATTER ( Mube’e ) NIBAF SALE CONTRACT SOLD GOOD OR SUBJECT MATTER ( Mube’e ) Existing Valuable Usable Capable of ownership/title Capable of delivery/possession Specific & Quantified Seller must have title & risk 1.1 Existable The subject matter of sale must be existing at the time of sale. Thus, a thing which has not yet come into existence cannot be sold. If a non-existent thing has been sold, even with mutual consent, the sale is void according to shari’ah. Eg. ‘A’ sells the unborn calf of his cow to ‘B’. The sale is void. 1.2 Valuable The subject of sale must be a property of value. Thus a thing having no value according to the usage of trade eg. a leaf or a stone on a roadside cannot be sold or purchased. 1.3 Usable The subject of sale should not be a thing which is not used except for a haram purpose, like pork, alcohol etc. 2.4 Capable of ownership/title The subject matter should not be anything which is not capable of ownership/title for eg. sea or sky. 2.5 Capable of delivery/possession For eg. an unconstructed building cannot be possessed since it is non-existent.

MURABAHA 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.

Difference between Murabaha & Musawima 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

BANKING MURABAHA 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.

BANKING MURABAHA 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.

SCOPE OF MURABAHA 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.

SCOPE OF MURABAHA 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.

Step by Step Murabaha

Stage One (a) for Murabaha financing 1- Promise stage Stage One (a) for Murabaha financing 1. Client approach the bank for facility through Murabaha. Facility approved Bank Client STEP BY STEP MURABAHA FINANCING 1.The client and the institution sign an overall agreement whereby the institution promises to sell and the client promises to buy the commodity from time to time on an agreed ratio of profit added to the cost. This agreement may specify the limit up-to which the facility may be availed. 2.An agency agreement is signed by both parties in which the institution appoints the client as his agent for purchasing the commodity on its behalf. 3.The client purchases the commodity on behalf of the institution and takes possession as the agent of the institution. 4.The client informs the institution that it has purchased the commodity and simultaneously makes an offer to purchase it from the institution. 5.The institution accepts the offer and the sale is concluded whereby ownership as well as risk is transferred to the client. All the above are necessary to effect a valid murabaha. If the institution purchases the commodity directly from the supplier it does not need any agency agreement. Note: The most essential element of the transaction is that the commodity must remain in the risk of the institution during the period between the third and the fifth stage. The above is the only way by which this transaction is distinguished from an ordinary interest-based transaction

Stage One (b) for Murabaha financing 1- Promise stage Stage One (b) for Murabaha financing 1. Client and bank sign an agreement to enter into Murabaha. Murabaha Facility Agreement MOU Bank Client STEP BY STEP MURABAHA FINANCING 1.The client and the institution sign an overall agreement whereby the institution promises to sell and the client promises to buy the commodity from time to time on an agreed ratio of profit added to the cost. This agreement may specify the limit up-to which the facility may be availed. 2.An agency agreement is signed by both parties in which the institution appoints the client as his agent for purchasing the commodity on its behalf. 3.The client purchases the commodity on behalf of the institution and takes possession as the agent of the institution. 4.The client informs the institution that it has purchased the commodity and simultaneously makes an offer to purchase it from the institution. 5.The institution accepts the offer and the sale is concluded whereby ownership as well as risk is transferred to the client. All the above are necessary to effect a valid murabaha. If the institution purchases the commodity directly from the supplier it does not need any agency agreement. Note: The most essential element of the transaction is that the commodity must remain in the risk of the institution during the period between the third and the fifth stage. The above is the only way by which this transaction is distinguished from an ordinary interest-based transaction

Stage One (c) for Murabaha financing 1- Promise stage Stage One (c) for Murabaha financing . Client submit the purchase requisition to the bank. purchase requisition /Promise to the bank. Bank Client STEP BY STEP MURABAHA FINANCING 1.The client and the institution sign an overall agreement whereby the institution promises to sell and the client promises to buy the commodity from time to time on an agreed ratio of profit added to the cost. This agreement may specify the limit up-to which the facility may be availed. 2.An agency agreement is signed by both parties in which the institution appoints the client as his agent for purchasing the commodity on its behalf. 3.The client purchases the commodity on behalf of the institution and takes possession as the agent of the institution. 4.The client informs the institution that it has purchased the commodity and simultaneously makes an offer to purchase it from the institution. 5.The institution accepts the offer and the sale is concluded whereby ownership as well as risk is transferred to the client. All the above are necessary to effect a valid murabaha. If the institution purchases the commodity directly from the supplier it does not need any agency agreement. Note: The most essential element of the transaction is that the commodity must remain in the risk of the institution during the period between the third and the fifth stage. The above is the only way by which this transaction is distinguished from an ordinary interest-based transaction

2- Agency stage 2. Client appointed as agent to purchase goods on bank’s behalf Bank Client Agreement to Murabaha Agency Agreement

Disbursement to the Supplier 2- Agency stage Stage Two for Murabaha financing . Bank gives money to supplier through client’s account for purchase of goods. Agreement to Murabaha Bank Client Islamic Bank Agency Agreement Disbursement to the Supplier

3. Acquiring Possession 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 Bank Client

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

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

4. Execution of Murabaha 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) Bank Client Payment of Price

Murabaha GENERAL MECHANICS VENDOR ISLAMIC BANK CUSTOMER Transfer of Title Transfer of Title VENDOR ISLAMIC BANK Agreement CUSTOMER Payment of Purchase Price Payment of Marked-up Price 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

STAGES OF MURABAHA 2. Agency Stage 3. Acquiring Possession 1. Promise Stage 2. Agency Stage 3. Acquiring Possession 4. Execution of Murabaha 5. After Execution of Murabaha

A- CREDIT APPROVAL (under Shariah perspective) STAGES OF MURABAHA PRIOMISE STAGE A- CREDIT APPROVAL (under Shariah perspective)

CREDIT APPROVAL (under Shariah perspective) Points to Be Considered While Approving Credit It is essential that the transaction between two parties must be genuine , not fictitious.

CREDIT APPROVAL (under Shariah perspective) Points to Be Considered While Approving Credit The Institution must insure that the party from whom the item is bought is a third party and not the customer or his agent . In this manner the transaction can be saved from Bai Inah (Buy Back) which is not allowed in sharia.

B- Murabaha Facility Agreement STAGES OF MURABAHA PRIOMISE STAGE B- Murabaha Facility Agreement MOU

Murabaha Facility Agreement MOU Mentioning Limits of each facility Security to be submitted by the Customer Other terms and conditions covering all the facilities approved for the Customer. The Agreement to be signed by both the parties.

Securities Against Murabaha Price

C- Purchase Requisition STAGES OF MURABAHA PRIOMISE STAGE C- Purchase Requisition

C- Purchase Requisition The Client orders the institution to buy certain goods for him and sell him the same after acquiring. Containing the details of the goods required to purchase from the Supplier, Cost Price and expected date of delivery The prerequisite is that the goods are not already owned by the client.

STAGES OF MURABAHA PRIOMISE STAGE D- Promise to Purchase

D- Promise to Purchase At this stage the customer promises the institution to buy the goods which were acquired by the institute on his request. Normally Purchase requisition contains this Promise.

G- PAYMENT OF MURABAHA Goods STAGES OF MURABAHA PRIOMISE STAGE G- PAYMENT OF MURABAHA Goods

G- PAYMENT OF MURABAHA Goods Advance payment can be made to the supplier. It is advisable that Murabaha payment to be made directly to the supplier by the bank.

STAGES OF MURABAHA 2-AGENCY STAGE

AGENCY STAGE Agency Agreement is not the condition of the Murabaha if the institution can make direct purchases from the supplier. The financial institution, does not have the expertise to identify the goods and negotiate an efficient price.

AGENCY STAGE The customer, however, being in the industry, can do this. The institution therefore appoints him as its Agent (which is also permissible), in the first step of the transaction, to identify and procure the goods on institution behalf.

AGENCY STAGE This is done by execution of Agency Agreement between the institution and the customer. However according to Sharia Perspective it is preferable to appoint the Agent other then customer.

AGENCY STAGE If goods are acquired from third party the execution of agency agreement will be between the institution & the third party..

TYPES OF AGENCY AGREEMENT AGENCY STAGE TYPES OF AGENCY AGREEMENT SPECIFIC AGENCY AGREEMENT When the purchase of commodity is not of consistent nature. GLOBAL AGENCY AGREEMENT When the purchase of commodity is of

STAGES OF MURABAHA 3-ACQUIRING POSSESION

Acquisition Of Title & Possession of The Asset 1-Institution must take actual or constructive possession of the item . The forms of taking delivery or possession of items differ according to their nature and customs. The item must move from the responsibility of the supplier to the responsibility of the institution . It is obligatory that the point when the risk of the item is passed on by the institution to the customer, be clearly identified. Acquisition Of Title & Possession of The Asset

Acquisition Of Title & Possession of The Asset 2.Goods must exists at the time of execution of Murabaha. If the above two are not fulfilled than the institution cannot execute Murabaha.

Acquisition Of Title & Possession of The Asset Documentary evidence required at the time of possession before execution of Murabaha i.e. delivery challan, gate passes and sales tax invoices.

Physical Inspection Importance of Physical Inspection. It is advisable that bank should appoint one person for physical inspection .Importance of Physical Inspection

4- EXECUTION OF MURABAHA STAGES OF MURABAHA 4- EXECUTION OF MURABAHA

Actual Murabaha Sale OFFER & ACCEPTANCE

OFFER TO PURCHASE The Customer will make an offer to purchase the goods acquired by him for Bank’s behalf mentioning the Offer Price .(Comprising Cost plus Bank’s Profit )

BANK’S ACCEPTANCE The Bank will accept the offer made by the Customer. All the terms of the Murabaha Transaction such as Sale Price ( Cost plus Profit ) Due Date or Schedule of Payments etc. must be mentioned in the Bank’s Letter of Acceptance. .

RELATIONSHIP At this stage relation of a Buyer & Seller comes into operation between the institution & the client. Since the sale is effected on deferred payment basis, the relation of Debtor and Creditor also emerges between them simultaneously.

ISSUES IN MURABAHA

Rollover in Murabaha Rescheduling is allowed but repricing is not allowed. Rollover is also not allowed.

Risk Management IN MURABAHA

Risk Dimensions Credit Liquidity Credit Credit Prising risk Banking Risks Credit Liquidity Credit Prising risk Market Islamic Banks also face Additional asset risk Greater fiduciary risks Greater legal risk Foreign Exchange Solvency Operational

END OF PRESENTATION JAZAKAMUALLAH