Post on 31-Dec-2015
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Islamic Modes of Financing PRODUCTS – Murabahah, Salam
and IstisnaMirpur, Azad Kashmir
11 – 12 June, 2008 Al – Huda Training Programme
Muhammad KhaleequzzamanHead Islamic banking DepartmentInt’l Islamic University Islamabad
Islamic Modes –
Sale Modes:
1. Murabahah to the purchase orderer
2. Salam as financing mode of Islamic banks
3. Istisna’ and parallel Istisna’
Participatory Modes:
1. Mudarabah (asset and liabilities side)
2. Musharakah as a mode for house finance
Rent based Modes:
1. Operating lease (Ijarah)
2. Ijarah wa Iqtina’
Contents:
1. Murabahah – Historical perspective
2. Spot and Deferred Murabahah
3. Banking Murabahah/Murabahah to the Purchase Orderer
4. Why Unilateral Promise?
5. Why Security Deposit?
6. Why Agency?
7. Issue of default / penalty
8. Pricing of Murabahah
Islamic Modes – Murabahah
Islamic Modes – Murabahah
Murabahah:Murabahah is simply a sale contract which fixes the price in terms of the sellers cost plus a specified percentage markup. The seller must disclose all items of expense which are included in the cost ie. All direct expenses incurred in acquiring that goods – trust relationship between bank and the clkient.
Uses of Murabaha• Sale of raw material• Sale of equipment• Sale of agricultural inputs• Sale of real estate and vehicles
Process Flow:Approval of Credit Facility – Negotiation/Approval of overall limit
– MOU/Murabahah Facility Agreement
– Requisition + Undertaking + Security Deposit
Bank ClientMOU/Facility Agreement
Approval of Limit
2
1
Requisition, Undertaking, Sec. Dep. 3
Islamic Modes – Murabahah
Process Flow:Agency/Payment to Supplier– Client appointed as agent [Optional] – When the
option to be used?– Payment to the Supplier – Direct
Client
Bank
Supplier3
2Agency Agreement
Payment Supplier
Client
Bank
Supplier2
1Agency Agreement
Payment
Islamic Modes – Murabahah
Process Flow:Acquiring / Possession /First sale
– Physical Possession / Constructive Possession• Payment to supplier• Discount of supplier• Title of goods• Transfer of risk and responsibilites
BankAgent
(Client)SupplierTitle Goods
Islamic Modes – Murabahah
Process Flow:
Execution of Murabahah / second Sale– Receipt / Possession report / Offer of client – Acceptance of offer by the bank– Return of security deposit– Delivery of goods / Transfer of Risk & responsibility– Ownership changes– Payment of earnest money (Urboun)
Payment of Murabahah Price– Client pays Murabaha price as per agreed schedule– Collateral released– Murabahah terminates
Islamic Modes – Murabahah
• Execution of Murabahah
Client Acceptance of Offer
1
2
3
Offer to Purchase
Receipt , Possession Report
Payment of Murabahah Price
Murabahah Terminates
1
IB Client Murabahah Price
2
IB
Hamish jiddiyah
Urboun/Securities 4
3
Islamic Modes – Murabahah
Purchase of poultry feed stock
• Murabahah transaction: Rs. 100,000• Murabahah Facility: 90 Days• Payment: Lump sum• Rate of Profit: Six months
KIBOR+2%• Freight: 5% of cost of
goods • Securities: Pledge of feed stock,
post dated cheques
Islamic Modes – Murabahah
Islamic Modes – Murabahah
Particulars Amount (Rs.)
Cost of goods Rs. 100,000
Rate of Profit Kibor + 2%
Six monthly KIBOR 10% p.a.
Freight 5% of cost
Total cost 100000 x 5% 100000 + 5000 =105000
Profit 10%+2% = 12% p.a. 105000 x 12% x 90/365 = 3107
Murabahah Price 105000+3107= 108107
Pricing of Murabahah [Example]:
Book Keeping of Murabahah: Funds are advanced to supplier for purchase
of goods and F&I paid On arrival of goods Murabahah purchase
account effected [bank becomes owner] Murabahah Facility A/C and Murabahah Profit
Receivable A/C are effected against Murabahah Sale A/C [goods sold]
Client’s A/C is effected against Murabahah Facility A/C and Murabahah Profit Receivable A/C (Murabahah price recovered]
Islamic Modes – Murabahah
Salam: Forward PurchaseA salam transaction is the purchase of a commodity for deferred delivery in exchange for immediate payment. It is a type of sale in which the price, known as the salam capital, is paid at the time of contracting while delivery of the item to be sold, known as subject matter of salam, is deferred. Salam is also known as Salaf (lit: borrowing)
Uses:– Purchase of commodities (financing for
production of agricultural commodities/ minerals)
– Liquidity requirements of sugar mills, etc.
Islamic Modes – Salam
Salam: Shariah Legitimacy Allh says “O ye who believe when you deal with
each other, in transactions involving future obligations in a fixed period time, reduce them to writing” [Al Baqara Verse 282]
Ibn Abbas reported, the Prophet (PBUH) came to Medina and found that people were selling dates for deferred delivery (salam) after a duration of one or two years. The Prophet (PBUH) said: “whoever pays for dates on a deferred delivery basis (salam) should do so on the basis of specified scale and weight” [Bukhari and Muslim]
Islamic Modes – Salam
Wisdom of allowing Salam Beneficial for both seller and
purchaser
Three major problems
1. Risk of default by seller
2. Bank’s need to liquidate goods after delivery
3. Seller’s inabillity to produce or procure commodity
Islamic Modes – Salam
Principles/conditions
An exception to the possession
A contract opposite to Murabahah
Payment of full price at spot - otherwise selling debt for debt
Allowed in fungible commodities
Product of a particular origin cannot be specified
Quality and quantity decided in un ambiguous terms
Allowed in fungible commodities
Product of a particular origin cannot be specified
Quality and quantity decided in un ambiguous terms
Islamic Modes – Salam
Principles/conditions Allowed in fungible commodities
Product of a particular origin cannot be specified
Quality and quantity decided in un ambiguous terms
Certain date and place of delivery
The commodity should remain in the market throughout the period of contract [Different opinions]
The time of delivery should be sufficient to allow use of salam capital conveniently and effect prices, preferably be at least 15-30 days from the date of contract [Different opinions]
A security/guarantee or is preferred as safeguard to the risk of default
Only commodity is delivered and not the money
Islamic Modes – Salam
Parallel Salam:The disposal of commodity at the end of Bank
can be through:– Parallel Salam:MFI may sell commodity, before the
date of delivery, to some other purchaser for the date of original delivery. The period in second contract will be shorter than the original contract, but price higher than the original contract.
– Unilateral Promise: Promise of purchase can be obtained from third party for delivery on the date of original contract. Price in this promise is set higher than parallel salam because the promisor has to
pay nothing.
Islamic Modes – Salam
Rules of Parallel Salam and Third party promise
Both the contracts viz. salam and parallel salam must be independent of each other
Parallel salam is allowed only with third parties [Agency allowed]
The third party giving unilateral promise should not pay the price as this is not allowed in Shariah
Islamic Modes – Salam
Bank transacts purchase of wheat Contract against payment of certain price
Commodity to be delivered in six months
Bank apprehends trend of depressed prices in the prospect OR requires liquidity
Bank’s position at disadvantage as compared to other purchasers contracting lower spot price but cannot undo the contractual obligation –
Bank can keep the original contract and enter another salam contract with a buyer expecting trend otherwise… can lower the price risk
Islamic Modes – Salam – Example