Info - Islamic Banking
Transcript of Info - Islamic Banking
http://lexicon.ft.com/Term?term=ijarah
Definition of ijarah
A type of contract in Islamic finance.
Islamic financial institutions use ijarah contracts either as a lessor or a lessee. Some
jurists define ijarah as ownership of the right to the benefit of using an asset for a period
in return for a consideration.
Ijarah is classified into operating ijarah, which doesn’t include a promise to transfer the
legal title of the leased asset into the lessee at the end of the lease, and ijarah muntahia
bittamleek, which is concluded by passing the legal title of the leased asset to the lessee.
For the ijarah contract to be valid it must be preceded by acquisition of the asset (or
theusufruct of the asset) to be leased by the institution (lessor). The ijarah contract is a
binding contract which neither party may terminate or alter without the other’s
consent.
The duration of the ijarah contract must be specified in the contract and normally
commences on the date of executing the contract unless a future date is agreed by both
parties. It is permissible that the Islamic bank requires the lease promissor (customer)
to pay to guarantee the customer’s commitment to accept a lease on the asset and the
subsequent obligations, provided no deduction to be made to this sum except for
damages suffered by the bank as a result of the customer’s breaching his promise.
No rental will be due if the lessor fails to deliver the asset to the lessee on the date
specified in the ijarah contract. At the end of the ijarah agreements the lessee has one
of three options; either to return the leased asset to the lessor or to renew the lease
contract for another term or to purchase the leased asset for a price that is determined
based on rental payments made by the lessee.
In the Islamic bank’s financial statements, the assets acquired for ijarah shall be
recognised at historical costs that include its net purchase price plus other expenditures
necessary to bring the asset into its intended use. Ijarah revenue (when the Islamic
bank is a lessor) and expense (when the Islamic bank is a lessee) are recognised when
the ijarah instalment becomes due. Normally the lessor will be responsible for major
repairs (other than periodic ones; which are borne by the lessee) unless they are the
result of the lessee’s misuse or misconduct. The Islamic bank should disclose the
accounting policies adopted for operating ijarah and ijara muntahia bittamleek in the
notes accompanying the bank’s financial statements.
http://www.albaraka.com/default.asp?action=article&ID=302
Ijarah and Ijarah Muntahia Bittamleek
Ijarah is an operating lease whereby the bank will buy and lease out equipment required
by the customer for an agreed rental fee. The agreement does not include a promise
that the leased asset at the end of the lease term will be transferred to the lessee.
Ijarah is defined in Fiqh as a “possession of a usufruct or benefits for consideration in
the Islamic Fiqh. This term is used to denote two things:
To employ the services of a person on wages given to him as consideration for
hhis hired services.
It relates to the usufruct of assets and properties. Here it means “ To transfer
the usufruct of a particular property to another person and exchange for a rent
claim from him†.
Ijarah is divided into two kinds:
Operational Lease
According to this mode, the Islamic bank maintains a number of various assets to
respond to the needs of different customers. These assets usually have a high degree of
marketability. The bank lets these assets to any party so desirous to utilize for a term to
be agreed upon. After the termination of the lease period the assets return to the bank,
on its part the bank looks for a new lessee.
The distinguishing feature of this mode is that the assets remain the property of the
Islamic bank to put them up for rent every time the Lease period terminates so as not to
remain unutilized for long periods of time.
Under this mode the bank bears the risk of recession or diminishing demand for these
assets.
The operation lease divides into:
Specific or determined lease: It is the lease of real property or other assets that
one can point to.
Lease described on liability: It is the Lease of benefit determined by
specifications agreed upon to be on liability such as a car or a ship, not particular
but precisely described to forbid dispute.
Ijarah Muntohia Bitamleek
It is a lease whereby the bank will buy and lease out equipment required by the
customer for an agreed rental fee. However, it differs from Ijarah in that such an
arrangement provides an option for the customer to acquire the ownership at the end
of a specified period.
The bank may also enter into a sale and leaseback agreement with the customer
whereby the bank will purchase the asset from the customer and leaseback under Ijarah
or Ijarah Muntohia Bittamleek arrangement.The accounting implications for the bank
will remain the same as for Ijarah / Ijarah Muntohia Bittamleek transactions.
The option for the lessee to acquire the leased asset may be exercised during the tenor
of the total lease period or at the end of the lease term as stipulated in the lease
agreement.The purchase option is obligatory for the customer (lessee).
Ijarah Muntohia Bittamleek concludes with the legal title in the leased asset being
passed
to the lessee. This includes the following types:
gift (transfer of legal title for no consideration)
transfer of legal title (sale) at the end of a lease for a token consideration or
other
amount as specified in the lease contract
transfer of legal title (sale) prior to the end of the lease term for a price that is
equivalent to the remaining Ijarah instalments applicable under gradual transfer
of legal title
(sale) of the leased asset.
Ijarah and Ijarah Muntohia Bittamleek contracts have three major elements:
offer and acceptance
two parties: the bank as lessor (the owner of the leased asset) and the client as
lessee (the party who reaps the services of the leased asset)
the object of the Ijarah contract, which includes the rental amount and the
service (transferred to the lessee).
http://www.financialislam.com/ijarah.html
Ijarah
Leasing is an agreement that permits one party (the lessee) to use an asset or property
owned by another party (the lessor) for an agreed-upon price over a fixed period of
time. It is a form of asset finance which has the benefit of using assets without the
requirements of ownership. The lessee acquires the asset he needs without borrowing
on interest and receives the benefits of use while the lessor receives the value of regular
rental payments for a specified period plus the residual value of the asset. The lease
may be written either for a short-term or for a long-term and its rules are similar to
those governing sale because in both cases there is a transfer of one thing between two
parties for valuable consideration. However, leasing differs from sale as its mechanism
allows the separation between ownership and use; in fact, it does not involve
transferring the corpus or ownership of an asset which remains with the lessor.
There are generally two types of leases: a finance lease and an operating lease. A
finance lease is mainly a method of raising long-term finance to pay for assets. It
provides the lessor with full recovery of its investment and a reasonable profit over the
initial non-cancelable lease term. This mode enables enterprises, especially SMEs, to
acquire assets, such as capital goods and high cost equipment, for which they do not
have the funds to make a large up-front payment that would otherwise be involved in a
direct purchase. In this type of lease, the lessor retains ownership of the equipment but
transfers to the lessee substantially all of the risks and rewards of ownership of the
asset. The lessee is responsible for the insurance, registration and maintenance of the
equipment.
Financial leases have some similar feature to secured loans. Both allow a business to use
an asset, such as equipment, over a fixed period, in return for regular payments. The
business client chooses the equipment it requires and the bank buys it on behalf of the
business. After all the payments have been made, the business client becomes the
owner of the equipment. The lessor's rate of return is fixed and is not dependent upon
the asset-value, performance, or any other extraneous costs. The fixed lease rentals give
rise to an ascertainable rate of return on investment. Therefore, by spreading payments
out over the lifecycle of the asset, the business is able to align the cost with the benefit
derived from the use of the leased asset. The lessor generally would not provide any
services relating to operation of the asset. In addition, financial leases are non-
cancellable; in fact, the lessee cannot return the asset and not pay the whole of the
lessor's investment.
On the other hand, when a risk is involving other than a plain financial risk in a lease, it is
an operating lease. In fact, an operating lease is similar to a rental agreement, and is not
a finance lease for the purpose of acquiring assets; operating leases take innumerable
forms based on the risks the lessor takes or avoids, and the involvement of the lessor in
operation of the asset. Operating leases are also referred to as a “non-full payout”
leases, because the amount of the rental does not cover the lessor’s full capital outlay
for the expected economic life of an asset, the minimum lease payments over the lease
term are such as to secure for the lessor the recovery of his capital outlay plus a market
return on funds invested and the lease period is always less than the working life of the
asset.
The basic features that differentiate an operating lease from a financial lease are related
to whether the lessor or the lessee takes on the risks of ownership of the leased assets.
In fact operating leases do not put the lessee in the position of a virtual owner; the
lessee is simply using the asset for an agreed period. Also, there is always a dependence
on the lessee's commitment to pay, as a result, the lessor also takes is asset-based. Its
rate of return in an operating lease is dependent upon the asset value, performance, or
costs relating to the asset; and is always a matter of probabilities and uncertainty.
Therefore, in an operating lease, the lessor normally holds a stock of assets with high
degree of marketability to provide to other entities. He may also provide any services
relating to these assets, such as maintenance or operations. The assets remain property
of the lessor who has the option to re-lease them every time the lease period
terminates. Accordingly, the lessor bears the risk of obsolescence, recession or
diminishing demand. In contrast, a financial lease provider operates like a lender except
that the lessor has the additional collateral of legal ownership of the assets without any
of the risks associated with ownership.
Valid lease
Since leasing is a variety of sale, it is lawful in everything that can lawfully be bought and
sold, and the rules of Shari´ah pertaining to sale are also generally applicable to leasing.
In fact, any Islamic financing mode should be asset-based there has to be an element of
risk taking. In fact, the profit is generated when an asset having intrinsic utility is sold or
offered for use; and one cannot claim a profit without bearing the risk connected to the
transaction. Therefore, most of the rules relating to the contract of sale come into
existence also apply to Ijarah or Islamic leasing. Muslim jurists have, however, singled
out some conditions the validity of an Ijarah contract with respect to the asset or service
hired and the rental.
The first conditions required in a valid Ijarah are that the two sides of the exchange must
both be known and specified in such a way that eliminates the possibility of
disagreement and dispute; that the usufruct in question has a financial or market value;
The assets from which it is almost impossible to derive any benefit from its use, cannot
become the subject of Ijarah; and also the agreement does not involve unlawful
activities and substances. The contracted usufruct and the rent should be ascertained
clearly and agreed in advance, either for the full period of the lease or for a specified
period in absolute terms.
Since leasing transfers the ownership of usufruct from the lessor to the lessee, the
former must not only own the assets involved but also be able to transfer the ownership
of its benefits to the lessee. If a particular asset is specified for Ijarah, the lease contract
cannot be executed before getting of the asset or its usufruct. It is also a requirement of
a valid Ijarah that the lease period must be specified and that the lessor retains
ownership of the leased asset during the entire period of the lease. Liabilities arising
from ownership will be borne by the lessor, while the liabilities relating to the use of the
property leased asset will be borne by the lessee. The lessee is liable for any loss to the
leased asset due to negligence, but he cannot be made liable for loss caused by factors
beyond its control.
The rental can be determined, with the mutual consent of the contracting parties, on
the basis of aggregate of the cost incurred by the lessor for the acquisition of the assets
to be leased and based on a reasonable rate of return by reference to an agreed
benchmark. If the lease is based on a floating rental rate, it is recommended to use a
well known benchmark or index to determine rentals of subsequent periods in a long-
term lease to avoid any dispute or injustice due to possible fluctuations in the market
rate structure and binding nature of the lease contract. The floating rate, however,
should be subjected to an upper limit in order to avoid the element of Gharar.
Furthermore, a stipulation may be inserted in the Ijarah contract making late payment
by the lessee over a period of time liable to a certain amount of charity. This may
provide prevention from late payment even though it does not compensate the lessor
for his opportunity cost over the period of default. The lessor may also approach a
competent court to award damages for any shortfall. The lessor can also demand
payment of an earnest money amount as advance payment of rentals to ensure that the
prospective lessee fulfils the commitment to take possession of the asset on lease when
purchased by the lessor. If the Ijarah contract is not executed for any reason attributable
to the lessee, the lessor can recover from the earnest money the amount of the actual
losses suffered loss incurred in this agreement. And unlike normal sale which cannot be
effected for a future date, Ijarah for a future date is permissible. The lease period and
the lessor’s entitlement to rent, however, begin form the date on which the leased asset
has been delivered to the lessee. The rent thereof may be payable in advance before
delivery of the asset to the lessee. Any advance rentals must be adjusted against future
rentals.
Finally, either the lessor or the lessee can make a unilateral promise to buy or sell the
leased asset at the end of the lease period, or earlier, at an agreed price, provided that
the lease agreement shall not be conditional upon such sale. On the other hand, the
lessor may make a promise to gift the asset to the lessee upon termination of the lease,
provided the lessee has fulfilled all the obligations under the contract. There must also
not be any stipulation in the contract purporting to transfer of ownership of the leased
assets at a future date.
Ijarah Muntahia-bi-tamleek
In the Islamic jurisprudence, one transaction cannot be conditioned by another
transaction. Ijarah and sale/purchase transactions are two different contracts and the
transfer of ownership in the leased property cannot be made by a sale contract on a
future date along with the Ijarah contract. Therefore a ‘Hire-Purchase’ agreement which
combines both lease and sale at the time of contract, it is not suitable for Islamic banks.
The method acceptable to Shari´ah is that the ownership remains with the lessor along
with all liabilities emerging from ownership. As a result, Islamic banks take the asset risk,
bear the ownership related expenses and give or take responsibility for transfer of the
asset to the lessee upon termination of the lease. This is done under Ijarah Muntahia-bi-
tamleek which includes a promise by the lesser to transfer the ownership of the leased
property to the lessee. The transaction basically remains that of Ijarah and the transfer
of ownership is kept separate from the main Ijarah contract. Under this arrangement,
the bank purchases the asset for the client who then leases the asset from the bank; at
the end of the lease term, the transfer of the asset ownership to the lessee is kept
separate.
Ijarah shares many common features with financial lease and hire-purchase
arrangements. It involves a lessor purchasing an asset and renting it to a lessee for a
specific time period at an agreed rental and at the end of the lease period transferring
the ownership of the asset to the lessee. However, Ijarah Muntahia-bi-tamleek is
different from the conventional leases where the rentals start accruing as soon as the
payment for purchase of the asset being leased is made by the lessor; while in Ijarah
Muntahia-bi-tamleek, rentals start at the time when the asset is supplied to the lessee
in useable form. Also, if the price of the asset is paid to the lessee instead of the
supplier, there must be an agency (Wakalah) agreement between the parties prior to
the lease agreement that gives authority to the lessee to purchase the asset on behalf of
the bank. If the asset is destroyed before its delivery to the lessee in useable form, the
loss will be that of the bank and not of the agent. Therefore, the risk of the asset will be
that of the bank as long as the client serves as its agent for purchase of the asset while
in conventional lease all risks are borne by the lessee.
In addition, is different from a hire purchase and finance lease in the sense that it is an
arrangement that does not comprise two contracts in one bargain; in fact, leasing is the
real and the major contract; therefore, it is subject to all Shari´ah rules of an ordinary
operating Ijarah contract. The transfer of ownership is processed through a separate
sale or gift contract. This other part of the deal is only a unilateral promise not binding
on the promissee and as such it is not a transaction until actually entered into by the
parties. In addition, Ijarah Muntahia-bi-tamleek is a fair arrangement based on justice
for both the parties; the lessor recovers cost of the leased asset and also the profit in
the form of rentals while the lessee can get ownership title of the asset at the end of the
lease period. The lessee is also protected from the loss by the lessor would bear all
responsibility for loss of the leased asset, in case of absence of negligence on the part of
the lessee.
Potential of Ijarah
There are many Islamic finance structures where Ijarah can be used. Islamic banks use
this mode of financing with the purpose of enabling customers to use durable goods and
equipment such as ships, housing, heavy machines and plants in productive enterprises
who may be unable to buy them for their production purposes. Ijarah has also huge
potential as a financing mode for retail, corporate and the public sectors and can also
play a crucial role in promoting Islamic finance industry. It can be used as incentive to
economic development as it is usually long term and offers potential for stimulating
productive industries.
Leasing is an attractive mode of investment for Islamic banks because assets acquired
under these contracts are usually of high quality, marketable and maintain their market
value well above book value; therefore, the bank does not have to depend so much on
the creditworthiness of the lessee, given that as a recourse, it can sell the asset to
dispose for cash in case of default. And since the Islamic bank acquires the desired asset
only when a client requests it and commits himself to enter into a lease contract with
the bank, the possibility of misuse of funds and assets is minimized and the bank can
make a profit by setting the rent at a level that covers, over the lease period, the
purchase price as well as a return in line with the current rate of mark-up. In fact,
Islamic banks can get variable and floating return on long term investments. And
although Ijarah is a longer-term financing instrument, a leasing contract can be
reviewed periodically. The financing party thus not tied down to a fixed return that may
not be in its investment goals.
Furthermore, Ijarah offers the advantage of not requiring collateral and thus of simpler
repossession procedures since ownership of the asset lies with the lessor. It also means
that it has greater in-built stability to contain inflationary pressures in the economy. The
lessor is only exposed to a low level credit risk from the lessee as the lease transaction
is, by definition, asset-backed. Ijarah has also become popular due to a tax advantages
as the rental can be offset against corporate tax by the lessee.
Finally, Ijarah can be used indirectly for Sukuk issues by the corporate and the
government sectors. Ijarah Sukuk represent leased assets without actually relating the
holders to any corporate body or institution. Securitisation on the basis of Ijarah is an
alternative tool to interest based borrowing provided it uses durable and useable assets.
For example, an aircraft leased to an airline can be represented in bonds and owned by
a number of Sukuk holders, each of them individually and independently collecting their
periodic rent from the airline company. The Sukuk holders are not owners of a share in a
company that owns the leased asset, but simply a sharing owner of a part of the aircraft
itself. Islamic banks are also able to offer leasing certificates to their depositor clients as
specific investment certificates as a form of declining equity. These mechanisms
facilitate the formation of fixed assets and can contribute to long term economically
beneficial investment.
murabaha
Definition
An Islamic type of financial transaction in which a person with
property/an asset to sell will rent/lease it to another interested buyer at a fully
disclosed rate of profit. This is similar to a rent-to-own situation in which
the owner maintains full property rights over the asset until the buyer has paid off
the note for the asset in full.
http://sharia-banking.blogspot.com/2006/10/al-murabaha.html
Islamic Banking
WEDNESDAY, OCTOBER 04, 2006
Al – Murabaha
Murabaha is one of the most commonly used modes of financing by Islamic Banks and financial institutions.
Definition
Murabahah is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit thereon. Thus, Murabahah is not a loan given on interest; it is a sale of a commodity for cash/deferred price.The Bai' Murabahah involves purchase of a commodity by a bank on behalf of a client and its resale to the latter on cost-plus-profit basis. Under this arrangement the bank discloses its cost and profit margin to the client. In other words rather than advancing money to a borrower, which is how the system would work in a conventional banking agreement, the bank will buy the goods from a third party and sell those goods on to the customer for a pre-agreed price.Murabahah is a mode of financing as old as Musharakah. Today in Islamic banks world-over 66% of all investment transactions are through Murabahah.
Difference between Murabahah and Sale
A simple sale in Arabic is called Musawamah - a bargaining sale without disclosing or referring to what the cost price is. However when the cost price is disclosed to the client it is called Murabahah. A simple Murabahah is one where there is cash payment and Murabahah Muajjal is one on deferred payment basis.
Arguments against Murabahah
An argument that arises in Murabahah is that profit or interest both are the same and Murabahah financing is the same as conventional banking. Islamic scholars however argue that in several respects a Murabahah financing structure is quite different to an overdraft organized along conventional lines and the former offers several benefits to the bank and its customers. Depositors are made to share in profits of the bank as a result of this financing. The basic difference is however the Aqd or the contract which
covers the Islamic conditions. If the contract has interest element then it will be void.
Basic rules for Murabahah Following are the rules governing a Murabahah transaction:
1. The subject of sale must exist at the time of the sale. Thus anything that may not exist at the time of sale cannot be sold and its non-existence makes the contract void.2. The subject matter should be in the ownership of the seller at the time of sale. If he sells something that he has not acquired himself then the sale becomes void.3. The subject of sale must be in physical or constructive possession of the seller when he sells it to another person. Constructive possession means a situation where the possessor has not taken physical delivery of the commodity yet it has come into his control and all rights and liabilities of the commodity are passed on to him including the risk of its destruction.4. The sale must be instant and absolute. Thus a sale attributed to a future date or a sale contingent on a future event is void. For example, 'A' tells 'B' on 1st January that he will sell his car on 1st February to 'B', the sale is void because it is attributed to a future date.5. The subject matter should be a property having value. Thus a good having no value cannot be sold or purchased.6. The subject of sale should not be a thing used for an un-Islamic purpose.7. The subject of sale must be specifically known and identified to the buyer. For Example, 'A' owner of an apartment building says to 'B' that he will sell an apartment to 'B'. Now the sale is void because the apartment to be sold is not specifically mentioned or pointed to the buyer.8. The delivery of the sold commodity to the buyer must be certain and should not depend on a contingency or chance.9. The certainty of price is a necessary condition for the validity of the sale. If the price is uncertain, the sale is void.10. The sale must be unconditional. A conditional sale is invalid unless the condition is recognized as a part of the transaction according to the usage of the trade.
Step by step Murabahah 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 conditions are necessary to effect a valid Murabahah. If the institution purchases the commodity directly from the supplier, it does not need any agency agreement.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.
Issues in Murabahah
Following are some of the issues in Murabahah financing:1. Securities against MurabahahPayments coming from the sale are receivables and for this, the client may be asked to furnish a security. It can be in the form of a mortgage or hypothecation or some kind of lien or charge.
2. Guaranteeing the MurabahahThe seller can ask the client to furnish a 3rd party guarantee. In case of default on payment the seller may have recourse to the guarantor who will be liable to pay the amount guaranteed to him.
There are two issues relating to this:a) The guarantor cannot charge a fee from the original client. The reason being that a person charging a fee for advancing a loan comes under the definition of riba.b) However the guarantor can charge for any documentation expenses.
3. Penalty of defaultAnother issue with Murabahah is that if the client defaults in payment of the price at the due date, the price cannot be changed nor can penalty fees be charged.In order to deal with dishonest clients who default in payment deliberately, they should be made liable to pay compensation to the Islamic Bank for the loss suffered on account of default.
However these should be made subject to the following conditions:a) The defaulter may be given a grace period of at-least one-month.b) If it is proven beyond doubt that the client is defaulting without valid excuse then compensation can be demanded.
4. Rollover in MurabahahMurabahah transaction cannot be rolled over for a further period as the old contract ends. It should be understood that Murabahah is not a loan rather the sale of a commodity, which is deferred to a specific date. Once this commodity is sold, its ownership transfers from the bank to the client and it is therefore no more a property of the seller. Now what the seller can claim is only the agreed price and therefore there is no question of effecting another sale on the same commodity between the same parties.
5. Rebate on earlier paymentsSometimes the debtors want to pay early to get discounts. However in Islam, majority of Muslim Scholars including the major schools of thought consider this to be un-Islamic. However if the Islamic bank or financial institution gives somebody a rebate on its own, it is not objectionable especially if the client is needy.
6. Calculation of cost in MurabahahThe Murabahah can only be effected when the seller can ascertain the exact cost he has incurred in acquiring the commodity he wants to sell. If the exact cost cannot be ascertained then Murabahah cannot take place. In this case the sale will take place as Musawamah i.e. sale without reference to cost.
7. Subject matter of the sale All commodities cannot be the subject matter in Murabahah because certain requirements need to be fulfilled. The shares of a lawful company can be sold or purchased on Murabahah basis because according to the principles of Islam the shares represent ownership into assets of the company provided all other basic conditions of the transaction are fulfilled. A buy back arrangement or selling without taking their possession is not allowed at all.Murabahah is not possible on things that cannot become the subject of sale. For example, Murabahah is not possible in exchange of currencies.
Basic mistakes in Murabahah Financing
Some basic mistakes that can be made in practical implications of the concept are as follows:
1. The most common mistake is to assume that Murabahah can be used for all types of transactions and financing. This mode can only be used when a commodity is to be purchased by the customer. If funds are required for some other purpose Murabahah cannot be used.
2. The document is signed for obtaining funds for a specific commodity and therefore it is important to study the subject matter of the Murabahah.
3. In some cases, the sale of commodity to the client is affected before the commodity is acquired from the supplier. This occurs when the various stages of the Murabahah are skipped and the documents are signed all together. It is to be remembered that Murabahah is a package of different contracts and they come into play one after another at their respective stages.
4. It is observed in some financial institutions that Murabahah is applied on already purchased commodities, which is not allowed in Shariah and can be effected on not yet purchased commodities.
Uses of Murabahah
Murabahah can be used in following conditions:Short / Medium / Long Term Finance for:· Raw material· Inventory· Equipment· Asset financing· Import financing· Export financing (Pre-shipment)· Consumer goods financing· House financing· Vehicle financing· Land financing· Shop financing· PC financing· Tour package financing· Education package financing· All other services that can be sold in the form of package (i.e. services like education, medical etc. as a package)·
Securitization of Murabahah agreement (certificate) is allowed at par value only. Other wise certain rules of Islamic Finance must be met.
Bai' Muajjal
Bai' Muajjal is the Arabic acronym for "sale on deferred payment basis". The deferred payment becomes a loan payable by the buyer in a lump sum or installment (as agreed between the two parties). In Bai' Muajjal all those items can be sold on
deferred payment basis which come under the definition of capital where quality does not make a difference but the intrinsic value does. Those assets do not come under definition of capital where quality can be compensated for by the price and Shariah scholars have an 'ijmah' (consensus) that demanding a high price in deferred payment in such a case is permissible.
Conditions for Bai' Muajjal
1. The price to be paid must be agreed and fixed at the time of the deal. It may include any amount of profit without qualms about riba.
2. Complete/total possession of the object in question must be given to the buyer, while the deferred price is to be treated as debt against him.
3. Once the price is fixed, it cannot be decreased in case of earlier payment nor can it be increased in case of default.
4. In order to secure the payment of price, the seller may ask the buyer to furnish a security either in the form of mortgage or in the form of an item.
5. If the commodity is sold on installments, the seller may put a condition on the buyer that if he fails to pay any installment on its due date, the remaining installments will become due immediately.
http://islamiceconomy.net/murabaha/
Murabaha
Murabaha is one of the Islamic Finance modes and it is very popular worldwide
nowadays. Murabaha; sometimes referred to as “Murabahah” is also known as
“corporate asset support”. The concept of murabaha can be summed up
as; “Bank finances the needed purchase, buys it, and resells it with a mark
– up”. murabaha financing means, “cost plus financing”.
Murabaha is an Islamic finance instrument which of course does not include
interest (usury – riba) in it. The philosophy laying in the roots of murabaha
financing is to supply a needed service, good or commercial right. Bank; Islamic
bank in this situation, buys that needed property or service in advance with cash
money than resells it to the client with an added profit as deferred payment base.
At first glance, murabaha transaction appears like just another term for
conventional interest loans; however, it is not. It has a different philosophy,
different rules and application. It would be important to note that murabaha
transactions are also approved to be halal by many Muslim scholars.
- Features of Murabaha -
1-) What makes murabaha transactions halal is that the bank or whatever the
finance instutition obtains the real ownership of good or service and it undertakes
a certain amount of risk during the process between purchase and sale. “Real
ownership” and “existence of risk” are keywords here; they are what makes
any transaction legitimate in Islam, halal.
2-) In murabaha transactions, banks must be financing a real economic activity,
in other words, financial sources must be transferred to a real production process
or commercial process.
3-) Before the customer starts paying for that good or service, Islamic bank must
be holding 100 percent ownership of that good or service. At this point, Islamic
bank also holds all the responsibility for that good or service too. After all the
payments are done; the ownership and responsibility passes the customer.
4-) Before the transaction takes place, all the features of good, property or
service that is the subject of murabaha transaction must be specified by both
parties; the quality, quantity, amount, price, cost, how much the bank will pay for
and for much it resells, payment period etc. So that, there will be no conflicts in
future and everything would be clear for both parties.
5-) If you go to a conventional bank, they will simply lend you an amount of
money to buy a good or service and they are not interested in how and where the
loan is used; they are just interested in securing the return of loan. For example,
you can get a loan to buy a house and you can spend it to buy illegal goods
because there are not enough control mechanisms. When it comes to murabaha,
Islamic bank handles all the process by own, carries out all the responsibilities,
secures everything and gets the job done.
Murabaha Structure
- An Example of Murabaha Application -
Suppose that Ahmad Rashid lives in Kuala Lumpur, Malaysia. He is working for
an engineering company and makes 5,000 USD a month. He wants to bu a
house which has a market value of 100,000 USD but He doesn’t have enough
money, so He has to wait. Instead, He goes to an Islamic bank and ask them to
buy that house for him.
Bank makes a consultation and tell him that they can sell that house to him for
110,000 USD; payment period is 50 months, 2000 USD per month. He agrees;
they sign a contract.
Islamic bank buys that house for 100,000 USD from the initial owner and buys it
for cash; customer starts to live in that house and starts making payments; each
month he got 2% of ownership. First month; banks has 98%, customer has
2%; second month bank has 96%, customer has 4%; and it goes on.
After all payments are done; customer gets 100 percent of ownership. That
house is all of him.
So, He has the advantage of earlier use of that house and Islamic bank makes
money. It seems like a legit win – win situation for both parties.
In this matter, murabaha is not much different from a company buys a good from
a wholesale retailer for 100 USD and resells it for 120 USD; it is the same cost-
plus financing.