MURABAHA

Murabaha is a kind of Sale whereby Cost as well as the Profit is known to the Buyer and the Seller. Payment of Murabaha price may be:

1) At spot In installments In lump sum after a certain time

Hence, Murabaha does not necessarily imply the concept of deferred payment.

PROCESS FLOW OF MURABAHA FINANCING

1. Client and the Bank sign an agreement to enter into Murabaha through a Master Murabaha Financing Agreement (MMFA).

Bank

Agreement to Murabaha

Client

PROCESS FLOW OF MURABAHA FINANCING

2. Client appointed as an agent to purchase goods on the Banks behalf.

Bank

Agreement to Murabaha

Client
Agency Agreement

PROCESS FLOW OF MURABAHA FINANCING

3. Bank gives money to an agent/supplier for purchase of goods.

Bank Agreement to Murabaha Agency Agreement Disbursement to the agent or supplier Client

Supplier

PROCESS FLOW OF MURABAHA FINANCING

4. The agent takes possession of goods on the Banks behalf.

Transfer of Risk Vendor Delivery of goods

Bank

Agent

PROCESS FLOW OF MURABAHA FINANCING

5(a). Client makes an offer to purchase the goods from the Bank through a declaration.

Bank
Offer to purchase

Client

PROCESS FLOW OF MURABAHA FINANCING

5(b). Bank accepts the offer and sale is concluded / culminated

Murabaha Agreement + Transfer of Title Bank Client

PROCESS FLOW OF MURABAHA FINANCING

6. Client pays agreed price to the Bank according to an agreed schedule. Usually on a deferred payment basis (Bai Muajjal)

Bank

Payment of Price

Client

STAGES IN MURABAHA FINANCING

There are two stages in Murabaha transaction:

Investment Stage (Agency to Purchase) Financing Stage (Declaration to payment)

Profit Recognition in Murabaha

The profit for the Murabaha transaction shall be recognized after the goods are sold by the bank to the customer.

MURABAHA DOCUMENTATION
There are a number of documents involved in a Murabaha financing transaction. The most essential of these documents are:

Master Murabaha Financing Agreement (MMFA) Agency Agreement Draw Down Notice Summary Payment Schedule Declaration Details of Assets

1) Master Murabaha Agreement

Its an agreement between the client and the Bank whereby the client agrees to purchase goods from the Bank from time to time as per the terms and conditions of this Agreement.

This is an over all facility agreement under which various Sub-Murabahas may be executed from time to time.

2) Agency Agreement

The client is appointed by the Bank as its agent to purchase goods. This agreement needs to be signed once between the client and the bank. The disbursement of funds is done under this Agreement. List of assets form part of the main Agency Agreement which defines the assets that the client is authorised to by on behalf of the bank acting as an agent.

3) Draw Down Notice

These documents are required for each disbursement/Murabaha tranche. Draw down notice must mention the amount.

4) Summary Payment Schedule

Summary of Payment schedule should be finalized prior to signing of declaration of Murabaha agreement.

5) Declaration (Offer & Acceptance document)

Declaration is to be signed by the customer immediately after the purchase of the goods by the customer. This document establishes the actual sale transaction, i.e. transfer of ownership of goods from the Bank to the customer. At this stage the specific details of the assets must be known i.e. quantity, quality, price etc. Proper timing of declaration is extremely important.

6) List of Assets

This forms part of the declaration whereby details of the goods purchased are disclosed. Purchase evidences to be attached with the details of assets as a proof of purchased by the client as an agent of the Bank. The purchase evidences may includes the invoices, good receiving notes, good delivery challans or any other suitable evidence, preferably in the name of the Bank or in the name of the client as an agent of the Bank.