Islamic Law of Business

Transactions

Assignment on Murabahah

Submitte To:
Sir Hasnain Ashraf

Submitted By:

Muhammad Arbaz Ashraf (4327)

Class:
MBA (22) B

Date: Friday April 29, 2011

MURABAHAH:
The Quran declares sales and purchases of mal (assets) for a profit to be
lawful. A murabahah is a sale on a cost-plus basis where payment of the
price (including the mark-up) is deferred to a later date. Murabahah is the
most popular and most common mode of Islamic inancing. It is also known as
Mark up or Cost plus financing. The word Murabahah is derived from the
Arabic word Ribh that means profit. Originally, Murabahah was a contract of
sale in which a commodity is sold on profit. The seller is obliged to tell the
buyer his cost price and the profit he is making. Murabahah sale which is the
sate of a commodity for the price at which the seller has purchased it, with
the addition of stated profit known to both the seller and buyer. In short, it is
a cost-plus-profit sale in which the profit is expressly disclosed by the seller.
if a person sells a commodity for a lump sum price or installment basis
without reference to the cost, this is not murabahah, even though he is
earning some profit on his cost because the sale is not based on a 'cost-plus'
concept. In this case, the sale is called musawamah. Due to specialty of
murabahah, it has been considered by the jurist as a sale based on trust.

Murabahah in Financing:
In financing, murabahah is used as a form of a sales contract in which the
financial institution or investors buy an asset and then later sell it to the
"borrower" at a marked up price, which includes a profit component.
Payments are made in installments, either on a deferred basis or through
upfront payment with deferred delivery. Murabahah instruments usually
supply only short-term financing.
Some observers see this mode of Islamic finance to be very close to a
conventional interest-based lending operation. However, a major difference
between murabahah and interest-based lending is that the mark-up in
murabahah is for the services the bank provides (for example, seeking and
purchasing the required goods at the best price) and the mark-up is not
stipulated in terms of a time period. Thus, if the client fails to make a
deferred payment on time, the mark-up does not increase from the agreed
price owing to delay. Also the bank owns the goods between the two sales,
which mean it carries the associated risks.
Subject of Murabahah:
The assets which are the subject of the sale must fulfill, among other things,
the following requirements:
♣ The subject of sale must exist and be in the ownership (physical or
constructive) of the bank at the time of sale. In other words, the
second contract must "follow" the first contract. This risk bearing by
the bank - even if for a short or fleeting time period - legitimizes banks'
profits under Shari'ah as distinct from prohibited riba.
♣ They must be something of value that is classified as property in fiqh
(Islamic jurisprudence) and must not be forbidden commodities, such
as alcohol, pork etc.

Conditions for Murabahah Contract:

♣ Goods to be traded should be real, but not necessarily tangible goods.
♣ Being a sale transaction, it is essential that the commodities, which are
the subject of sale in a Murabahah transaction, must exist, owned by
the Islamic Bank and in his physical or constructive possession.
♣ An offer and acceptance, which will include certainty of price, place of
delivery, and date on which the price, if deferred, will be paid.
♣ Once the sale transaction has been concluded, the selling price
determined cannot be changed.
♣ Buy-back arrangement is prohibited. Therefore, commodities already
owned by the client cannot become the subject of a Murabahah
transaction between him and Islamic Financial Institution.

The Principal Steps of a Murabahah Transaction:

a) The client indicates an interest in purchasing a particular asset from
the bank for a certain price (a combination of cost price plus profit) at
a certain time.
b) The client identifies the vendor, selects the goods and advises its
particulars, including the vendor's name and its cost price to the bank
in writing. Often the bank will appoint the client as its wakil (agent) to
acquire the asset on the bank's behalf.
c) The bank acquires the asset and offers to sell it to the client. The
vendor will typically make delivery of the asset to the client (as the
bank's agent). Delivery need not be physical; it can also be
constructive.
d) The agency contract comes to an end. The client accepts the offer and
the bank immediately sells the asset to the client, with payment due
on the agreed date in the future.

Applications of Murabahah:
 • Murabahah transaction is the simplest from of an Islamic Financial
Transaction. Murabahah can be used to finance the purchase of any
assets which is recognized as Mal-e-Mutaqawam (Valuable) under
Shariah.
• A wide range of customer needs can be catered through financing
purchase of different assets by the customers.
• This is used in: Import finance, Export finance, House financing, Car
financing, working capital financing, etc.

Conclusion
 Murabahah transaction is the simplest from of an Islamic Financial
Transaction.

 Murabahah can be used to finance the purchase of any assets which is

recognized as Mal-e-Mutaqawam (Valuable) under Shariah.

 A wide range of customer needs can be catered through financing

purchase of different assets by the customers.

 Murabahah transaction is sensitive transactions and requires extreme

care in execution.

 A small mistake at any stage may convert Murabahah into an interest

based loan.

 It is the responsibility of each one of us to ensure that our Murabahahs

are executed in the best manner and the income derived is Halal in
true letter and spirit.