Agreement – Murabaha Structure
Terms & Conditions
Details of Branches
Murabaha means sale of goods where the seller is obliged to disclose to the buyer the cost of goods sold. The sale could either be on cash on a deferred payment basis. The parties agree on the cost of goods sold and the profit margin included in the selling price. Murabaha can be used for the purchase of physical assets e.g., raw material, inventory, equipment, etc. This structure cannot be used to purchase services.
The Term Finance is based on the concept of Diminishing Musharakah (DM). Diminishing Musharakah is a form of co-ownership in which two or more persons have joint ownership of a tangible asset in an agreed proportion. Then, one of the co-owners purchases, in periodic instalments, the share of the other co-owner until the ownership of that tangible asset is completely transferred to the purchasing co-owner. Furthermore, along with the purchase of share, the (purchasing) co-owner will also make periodic payments due for the usage of other co-owner’s share in the asset. Diminishing Musharakah can be used for medium to long term finance for plant, machinery, equipment, etc.
Under this arrangement, the Bank enters into a Musharakah agreement with the customer whereby the Bank agrees to finance the customer’s business on a profit and loss sharing basis. The Bank can take profit on provisional payment basis which would be subject to adjustment when the customer’s financial statements are published
This is used to provide working capital to customers for their day to day business requirements. The product operates on the concept of Musharakah whereby the Bank enters into a Musharakah agreement with the customer where the Bank agrees to invest funds in customer’s business on a profit and loss sharing basis.
Product is based on the concept of Murabaha. The Customer opens LC as the Bank’s undisclosed agent and upon receipt of import documents, the Bank makes payment to the supplier. On arrival of goods, the Bank sells the goods to the customer. In case the customer is not seeking finance, the Bank sells the goods to the customer against spot payment. If the customer is seeking finance, goods will be sold to the customer on a deferred payment basis.
Product is based on the concept of Kafalah. In case of LC Issuance under Kafalah, the Bank Issues LC as Kafeel (guarantor) on behalf of the customer and upon receipt of import documents to the Bank, the customer makes payment to the supplier from their own sources
This product operates on similar structure as Saadiq Import Finance under LC issuance.
This product is based on the concept of Kafalah. A contract is made between the Bank and another party (the beneficiary) whereby the Bank undertakes to pay an agreed sum if the customer fails or defaults in fulfilling his performance/financial obligation to the beneficiary under the terms and conditions of the guarantee
Islamic LC confirmation operates on the principles of Kafalah. The product is essentially a guarantee by the Bank (the confirming bank) to make payment of an LC which has been opened by some other Bank (the issuing bank) upon failure of the issuing Bank to honour its commitment under the LC
This product is based on the concept of Musawamah. Under this structure, the exporter sells the underlying goods of the LC to the Bank for a discounted price and the Bank then sells the same goods to the importer for the LC value by making the exporter an agent for the Bank. Saadiq Credit Bill Collection operates on the Bank’s general practice.
This product operates on similar structure as Saadiq Export Bills under LC.
What is Islamic Banking?
Islamic banking is a system of conducting banking activities in line with the principles of Shariah while avoiding all the prohibited activities such as
Interest/Riba, Gharar* (uncertainty), dealing in prohibited businesses (e.g. alcohol, gambling), etc.
‘Interest free banking’ is just one of the pillars of Islamic banking. Islamic banking means not only to avoid interest-based transactions, but also to avoid unethical and socially unacceptable practices prohibited in Shariah, such as unfair trade practices, hoarding, speculation, etc.
Hence, Islamic banking transactions are based on ‘tangible assets and real services’ as opposed to ‘conventional money lending’
* Gharar: The uncertainty that is present in the basic elements of an agreement (i.e. wording of the agreement, subject matter, etc.)
Is Islamic banking meant only for Muslims?
The teachings of Islam are meant for both Muslims and non-Muslims. Universal values like honesty, justice, avoiding fraud, etc., form the basic principles of Islamic banking. Therefore, Islamic banking is for everyone irrespective of what religion they follow. Furthermore, it increases the growth of an economic system.
What is meant by Shariah?
Shariah means a “Way” or “Path”. In Islam, Shariah means guidance and laws given by the Holy Quran and the Hadith/Sunnah of the Holy Prophet (Peace Be Upon Him). It also includes juristic interpretations of Islamic scholars. Islamic Shariah is derived from the following four sources:
What is Riba or Interest?
“Riba” means excess, increase or addition. As per Hadith of the Holy Prophet (Peace Be Upon Him), “Every loan that derives a benefit (to the lender) is Riba”. Therefore, interest means giving and/or taking of any excess amount in exchange of a loan or on debt. Hence, it has the same meaning as that of Riba.
What are the different kinds of Riba?
According to Islamic jurists, there are two types of Riba: (1) Riba Al Nasiah and (2) Riba Al Fadl.
What are the revelations / verses in Holy Quran and Sayings / Ahadiths of our Holy Prophet (Peace Be Upon Him) regarding prohibition of Riba / Interest?
The prohibition of Riba has been announced in Quran and Ahadiths. There are four sets of revelations about Riba which were revealed on different occasions:
In Surah Ar-Rum, verse 39, dealing in Riba has been discouraged in the following words:
“Whatever Riba (increased amount) you give, so that it may increase in the wealth of the people, it does not increase with Allah; and whatever Zakah you give, seeking Allah’s pleasure with it, (it is multiplied by Allah, and) it is such people who multiply (their wealth in real terms)”
In Surah An-Nisa, verse 161, Muslims were informed about the practice of taking Riba by Jews:
“and for their charging Riba (usury or interest) while they were forbidden from it, and for their devouring of the properties of the people by false means. We have prepared, for the disbelievers among them, a painful punishment.”
In Surah Al-Imran, verse 130, Riba/Interest was abolished in the following words:
“O you who believe, do not eat up the amounts acquired through Riba (interest), doubled and multiplied. Fear Allah, so that you may be successful.”
In the Surah Al-Baqarah, verse 275-281, Riba has categorically been prohibited in all its forms.
“Those who take Riba (usury or interest) will not stand but as stands the one whom the demon has driven crazy by his touch. That is because they have said: “Sale is but like Riba”, while Allah has permitted sale, and prohibited Riba. So, whoever receives an advice from his Lord and desists (from indulging in Riba), then what has passed is allowed for him, and his matter is up to Allah. As for the ones who revert back, those are the people of Fire. There they will remain forever.  Allah destroys Riba and nourishes charities, and Allah does not like any sinful disbeliever .
Surely those who believe and do good deeds, and establish Salah (prayer) and pay Zakah will have their reward with their Lord, and there is no fear for them, nor shall they grieve.  O you who believe, fear Allah and give up what still remains of Riba, if you are believers.  But if you do not (give it up), then listen to the declaration of war from Allah and His Messenger. However, if you repent, yours is your principal. Neither wrong, nor be wronged.  If there is one in misery, then (the creditor should allow) deferment till (his) ease, and that you forgo it as alms is much better for you, if you really know.  Be fearful of the day when you shall be returned to Allah, then every person shall be paid, in full, what he has earned, and they shall not be wronged. ”
According to Islamic jurists and scholars, there are around 40 different Ahadiths of Holy Prophet (Peace Be Upon Him) on the subject of Riba and its prohibition.
Few of them are as follows:
Therefore, all Islamic jurists have consensus that interest is Riba in all its forms and manifestations.
Quranic Verse’s translation from “The Meanings of the NOBLE QURA’N with explanatory notes by Mufti Muhammad Taqi Usmani”.
Are Islamic banks not just paying interest and dressing it as profit on trade and investments?
This is not the case. Islamic banks accept deposits from customers on profit and loss sharing or on the basis of “Qard”. These funds are used in Shariah compliant modes of finance, trade or investment. The income generated by these Shariah compliant modes are then distributed among the depositors as profit
How can Islamic banks be considered Islamic when they are using an interest based system (KIBOR) as a benchmark while determining profit?
As we all know, the Islamic banking industry is in its initial development stage. Ideally, Islamic banks should have their own KIBOR equivalent benchmark system. However, the nature/structure of the transaction determines its validity and using an interest rate benchmark for determining the profit of any permissible transaction does not render the transaction as invalid or Haram.
Why is the end result of Islamic banking and conventional banking the same. What is the difference between the two?
The validity of a transaction does not depend on the end result, rather it depends on the process and the sequence of activities performed in reaching the end. If a financial transaction is done according to the rules of Islamic Shariah, it is Halal even if the end result of the transaction may look similar to a conventional Banking transaction.
For example, the meat of a goat which is not slaughtered according to the principles of Islam and the meat of a goat which is slaughtered as per Islamic principles may look similar, smell similar and taste similar, but the former is Haram (prohibited) and the latter is Halal (allowed).
The same example can be used for Islamic and conventional banking as well. Making a transaction valid or Halal will depend on the process and sequence of transactions and not the end result. Hence, on face value, Islamic banks may look similar to conventional banks, but the contracts and product structures used by Islamic banks are different from conventional banks.
Furthermore in the verse 2:275 of the Holy Quran, Allah has responded to the apparent similarity between trade and interest by saying that He has permitted trade and prohibited Riba (though they may look similar).
What is the difference between conventional banking and Islamic banking?
The following are the main differentiating points between conventional banking and Islamic banking.
|CONVENTIONAL BANKING||ISLAMIC BANKING|
|1||Money is a commodity as well as a medium of exchange. Therefore, it can be sold at a price higher than its face value and it can also be rented out.||Money is not a commodity. It is only used as a medium of exchange. Therefore, it cannot be sold at a price higher than its face value or rented out|
|2||Profit is earned by charging interest on capital. ‘Time value’ is the basis for charging interest on money/capital.||Profit is earned through trade of goods or charging for providing services.|
|3||Interest is charged even in case the organisation suffers losses by using the bank’s funds. Therefore, it is not based on profit and loss sharing.||Islamic banks may operate on the basis of profit and loss sharing. If the business has suffered losses, the bank will share these losses based on the mode of finance used (e.g. Mudarabah and Musharakah).|
|4||While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods and services is made.||The execution of agreements for the exchange of services is a must while disbursing funds under Murabaha, Salam and Istisna contracts|
|5||Conventional banks use money as a commodity which leads to inflation.||Islamic banking tends to create link with the real sectors of the economic system by using trade related activities. Since money is linked with real assets, it contributes directly to economic development.|
Shariah Compliant Modes of Banking & Finance
Investment / Participatory Modes
Mudarabah is an arrangement in which a person (called Rab-ul-Mal) participates with his money and another person (called Mudarib) participates with his efforts. The parties agree, at the beginning, on a profit sharing ratio between them
Musharakah is a partnership contract. The profits are shared as per agreed ratios between partners and losses are borne in proportion to their respective capital contributions.
Diminishing Musharakah (DM) is a form of co-ownership in which two or more persons share the joint ownership of a tangible asset (e.g. house) in an agreed proportion. It is agreed that one of the co-owners will purchase, in periodic instalments, the share of the other co-owner until the ownership of that tangible asset is completely transferred to the purchasing co-owner. Furthermore, along with the purchase of share, the (purchasing) co-owner will also make periodic payments for the usage of other co-owner’s share in the asset.
Trading / Sales Modes
Murabaha means sale of goods where the seller is obliged to disclose to the buyer the cost of goods sold. The sale could either be on cash or on a deferred payment basis. The parties agree on the cost of goods sold and the profit margin included in the selling price.
Musawamah is the general sale of goods whereby the seller is not obliged to disclose to the buyer the cost of goods sold.
Salam is a sale transaction in which the seller agrees to supply specific goods to the buyer at a future date against an advance payment which is fully paid at spot. The basic purpose of Salam is to meet he needs of the small farmers for the production of agricultural products.
Istisna is a sale transaction where a commodity is transacted before it comes into existence. In Istisna, the buyer is given an order to manufacture a specific commodity. Following are necessary conditions for Istisna:
Ijarah is a type of rental contract whereby the owner of an asset (e.g. car), transfers the right to use to another person for an agreed period and price
Fee / Service Modes
Wakalah is an agency contract in which one person appoints another person as his agent to perform a certain task on his behalf on agreed terms and conditions, usually against a certain fee. A contract of Wakalah can take place only in respect of such acts which the principal is competent to perform himself, provided such act can be performed by the agent.
Kafalah is a contract in which a third party becomes surety i.e. provides guarantee for the payment of debt on behalf of the debtor. It is a pledge given by a third party to a creditor to the effect that if the debtor defaults in payment of the debt, it will be paid by said third party as Kafeel or guarantor
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