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MURABAHA FINANCE
Abdur Rashid Mirza

University of Lahore School of Accountancy and Finance Lecture no.07 Financial Engineering

DEFINATION OF MURABAHA
The

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

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.
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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.

FEATURES OF MURABAHA
Murabaha

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

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. of Murabaha Price can be made in lump sum or in installments or combination of both.
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Payment

FEATURES OF MURABAHA
It

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

Credit Sales (Bai-Bithman Ajil)

This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabahah, except that the debtor makes only a single installment on the maturity date of the loan. By the application of a discount rate, an Islamic bank can collect the market rate of interest.
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Murabahah and Al Bai Bhitaman Ajil (BBA)

In Murabahah, both parties to the transaction must know the cost and also the profit. This is a trust-sale where the buyer trusts that the seller has made a truthful disclosure about the cost and Profit. Payment of the price may be spot or deferred depending on the agreement. A Bai Bithaman Ajil (BBA) refers to the deferred mode of payment in a sale. It is also known as Bai Muajjal.

In BBA- the deferred payment has been made and agreed at the beginning of the contract.

Example 1: Classical Murabahah

Jamil needs to buy a car and he approaches an Islamic bank who is the vendor for cars. Jamil chooses to purchase a car that costs RM50,000. The bank sells the car to him at RM60,000 (RM50,000 cost + RM10,000 profit). He would have the option to pay the Islamic bank in deferred installments over 8 years.

Example 1

BBA has been subject to some controversies regarding its permissibility because the price charged in a deffered sale is higher than its spot price.

According to majority of scholars, the deferred price may be more than the spot price, however the price must be fixed at the time of sale.

IJARAH
Abdur Rashid Mirza

University of Lahore School of Accountancy and Finance Lecture no.07

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THE CONCEPT OF IJARA

BASIC RULES OF IJARA

Transferring of usufruct not ownership (the right to enjoy benefits or profits from something, as real property, while not being the owner of it).
To another person for an agreed price, at an agreed consideration.

Subject of lease
Valuable, Identified and Quantified

Consumable things cannot be leased out

Anything which cannot be used without consuming cannot be leased out; e.g., money, wheat etc.

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Concept of Ijarah

Ijarah is a term of Islamic fiqh. It means to give something on rent. Ijarah related to the usufructs (the right to enjoy benefits or profits from something, as real property, while not being the owner of it.) of assets and properties, and not the services of human beings. Ijarah in this sense means to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him. In this case, the term Ijarah is similar to the English term leasing. Here the lessor is called Mujir, the lessee is called mustajir and the rent payable to the lesser is called ujrah.
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BASIC RULES OF IJARA

Leased property remains in the ownership of the seller. Must be determined in clear terms at the time of contract If no specific purpose is identified in the agreement, then it can be used for any purpose for which it is used in normal course.

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BASIC RULES OF IJARA

Lessee as Ameen
The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or negligence. The leased asset shall remain in the risk of the lessor throughout the lease period.

Lease of jointly owned property

Is permitted and rentals shall be distributed between all the joint owners according to the proportion of their respective shares in the property.

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BASIC RULES OF IJARA

Determination of Rental
The rental must be determined at the time of contract for the whole period of lease. It is permissible that different amounts of rent are fixed for different phases during the lease period, provided that the amount of rent for each phase is specifically agreed upon at the time of effecting a lease. The determination of rental on the basis of the aggregate cost incurred in the purchase of the asset by the lessor, as normally done in financial leases, is not against the rules of Shariah.

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BASIC RULES OF IJARA

Determination of Rental
The lessor cannot increase the rent individually, and any agreement to this effect is void. The lease period shall commence from the date on which the leased asset has been delivered to the lessee.

Rental will be charged when the Leased asset is handed over to the lessee.

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IJARA AS A MODE OF FINANCING

1.

Rent should be charged after the delivery of the leased asset to the lessee and not from the day the price has been paid. If the supplier has delayed the delivery after receiving the full price, the lessee should not be liable for the rent of the period of delay.

2.

Expenses consequent to ownership to the lessor

As the lessor is the owner of the asset, he is liable to pay all the expenses incurred in the process of its purchase and its import to the country of the lessor for example expenses of freight and customs duty etc.

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IJARA AS A MODE OF FINANCING

4. Lessee as Ameen The lessee is responsible for any loss caused to the asset by his misuse or negligence. He can also be made liable to any normally occurring wear and tear.
5.

Variable Rentals in Long Term Leases In this case the lessor has two options: A lease contract can have a condition that the rent shall be increased according to a specified proportion (e.g. 5%) after a specified period (like one year). He can contract lease for a shorter period after which the parties can renew the lease at new terms and by 21 mutual consent

IJARA AS A MODE OF FINANCING

6. Penalty for late payment of Rent The lessor cannot charge an additional amount in case the lessee delays payment of the rent. Penalty of late payment is given to charity by lessee 7. Termination of Lease If the lessee breaks any term of the agreement, the lessor has a right to terminate the lease contract individually. If not then it can be terminated through mutual consent only. However, in such a case he cannot charge rentals of remaining period. Further more, the destruction of the asset also terminates the lease. In the event of lessees death the lease will also be terminated

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IJARA AS A MODE OF FINANCING

08. Insurance of the assets
If the leased property is insured under the Islamic mode of Takaful, it should be at the expense of the lessor and not at the expense of the lessee

09. The residual value of the leased asset

The lessor may enter into a independent undertaking to sell the leased asset to the lessee at the end of the lease period. This undertaking will be binding on the lessor only. 23

Author Introduction
Abdur Rasid Mirza, Economic and Financial Analyst Associated Consulting Engineers ACE (Pvt.) Ltd. Faculty Member of University of Lahore, School of Lahore, School of Accountancy and Finance Research Scholar (Islamic Banking and Finance) Mobile no. 0300-4210261 Email Address: yourarm1972@hotmail.com Email address: yourarm@yahoo.com

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JAZAKUM UALLAH

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