In Focus : Murabahah contract

 

Murabahah (cost plus profit sale) is one of the most commonly used mode of FINANCING by Islamic financial institutions, especially in the middle-east regions. In countries such as Malaysia however, a different model is more popular i.e. the Bai Bithaman Ajil (BBA), Ijarah or the Musyarakah (and to a certain extend, Musyarakah Mutanaqisah).

Why Murabahah is one more popular form of contract is that the contract is simple to understand and follow and do not require a high degree of sophistication. It is a contract which caters to the simple for of buy and sell, where the straight-through process is easily determinable. It is contract most suitable for any at-arms-length type of transaction, where transparency is the main component.

In Malaysia, for example, the Murabahah is used more for short term financing (less than 1 year pay-off period) rather than long term financing such a Home Financing, which uses the BBA contract.

Definition of Murabahah

Murabahah is a particular kind of sale where the SELLER expressly mentions the incurred COST of the sold commodity, ADD a profit to the cost of the commodity and declares the PROFIT he has earned on the commodity to the BUYER. Thus, the Murabahah is not a loan given on interest, but it is SALE of a commodity for CASH or DEFERRED price. Murabahah involves the purchase of a commodity by the Bank, on behalf of the customer, which is to be sold to customer on a cost-plus-profit basis. Under this arrangement, the Bank DISCLOSES its cost and profit margin to the customer.

MURABAHAH CONTRACT : Each of the following items must be disclosed

COST PRICE OF GOODS (spot) + THE SELLER PROFITS (value added) = SALE PRICE OF GOODS (deferred payment)

In other words, the Bank will buy the desired goods from a third party (or supplier) and sell those goods onto the customer for a pre-agreed price, which is inclusive of the profit the Bank will earn from the customer for the transaction. The profit must be real in terms of substance i.e. the transfer from the supplier and customer must provide a value to the whole transaction.

Basic Rules of Murabahah

1. The subject of sale must exist at the time of the sale. Anything that does not exist at the time of the sale cannot be sold and its non-existence makes the contrract void.
2. The subject of sale must be in the ownership of the seller of the time of the sale. If he sells something that is not FULLY owned by him, the sale of the goods 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 the seller has not taken physical delivery of the goods, but he has control of its rights and liabilities of the goods including the risks (such as risk of destruction or loss) .
4. The sale must be instant and absolute. The sale of goods at a future date or event is void. For example, a Murabahah contract cannot be concluded if the the customer, on 1st January, agrees to sell the goods on 1st February if the goods are already available. A transaction involving the conclusion of a sale at a future date can only be transacted under a different contract i.e. the Salam or Istisna contract, which has a list of its specific terms and conditions.
5. The subject of sale must be valuable. The goods must have an explicit material value, which can be determined by the market. Goods without real value cannot be bought or sold.
6. The subject of sale should not be a thing used for un-Islamic purpose.
7. The subject of sale must be specifically made known and identified to the buyer. If the goods are not specified and agreed to up-front, the sale is void as the goods may not be the agreed goods at the point of sale. There is a possibility for abuse and conflict should the goods not agreed upon.
8. The delivery of the subject of sale must be certain i.e. not depending on a contingency or chance. The possibility of delivering the goods is to be assured.
9. The price of the subject of sale must be certain and becomes a necessary condition to the validity of the sale contract. If the price is uncertain, the sale is void.
10. The sale must be unconditional. A conditional sale is invalid unless the condition is recognised by both parties as an integral / unavoidable part of the transaction according to the usage of the trade.

(Source : Meezan Bank’s Guide to Islamic Banking)