Islamic Shariah Law

Bai-Murabaha may be defined as a contract between a Buyer and a Seller under which the Seller sells certain specific goods permissible under Islamic Shariah and the Law of the land to the Buyer at a cost plus agreed profit payable in cash or on any fixed future date in lump sum or by instalments. The profit marked-up may be fixed in lump sum or in percentage of the cost price of the goods.

In respect of dealing parties Bai-Murabaha may be of two types. 2. 01Ordinary Bai-Murabaha If there are only two parties, the seller and the buyer, where the seller as an ordinary trader purchases the goods from the market without depending on any order and promise to buy the same from him and sells those to a buyer for cost plus profit, then the sale is called Ordinary Bai-Murabaha. 2. 02Bai-Murabaha on Order and Promise

If there are three parties, the buyer, the seller and the Bank as an intermediary trader between the buyer and the seller, where the Bank upon receipt of order from the buyer with specification and a prior outstanding promise to buy the goods from the Bank, purchases the ordered goods and sells those to the ordering buyer at a cost plus agreed profit, the sale is called “Bai-Murabaha on Order or Promise”, generally known as Murabaha.

This Murabaha upon order and promise is generally used by the Islami Banks, which undertake the purchase of commodities according to the specification requested by the Clients and sale on Bai-Murabaha to the one who ordered for the goods and promised to buy those for its cost price plus a marked-up profit agreed upon previously by the two parties, the Bank and the Client. In this Bank, Bai-Murabaha is treated as a contract between the Bank and the Client under which the Bank purchases the specified goods as per order and specification of the Client and sells those to the ordering Client at a cost plus agreed upon profit payable within a fixed future date in lump sum or by fixed instalments.

Thus it is a sale of goods on profit by which ownership of the goods is transferred by the Bank to the Client but the payment of the sale price (cost plus profit) by the Client is deferred for a fixed period. It may be noted here that, in case of Bai-Muajjal and Bai-Murabaha, Islamic Bank is a financier to the Client not in the sense that the Bank finances the purchase of goods by the Client, rather it is a financier by deferring the receipt of sale price of the goods sold by the Bank to the Client.

If the Bank does not purchase the goods or does not make any purchase agreement with seller, but only makes payment of any goods directly purchased and received by the Client from the seller under Bai-Muajjal/Bai-Murabaha Agreement, that will be a remittance of the amount on behalf of the Client, which shall be nothing but a loan to him and any profit on this amount shall be nothing but Interest (Riba).

Therefore, purchase of goods by the Bank should be for and on behalf of the Bank and the payment of price of goods by the Bank must be made for and on behalf of the Bank. If in any way the payment of price of goods is turned into a payment for and on behalf of the Client or it is paid to the Client any profit on it will be Riba.

It is permissible for the Client to offer an order to purchase by the Bank particular goods deciding its specification and committing himself to buy the same from the Bank on Murabaha, i. . cost plus agreed upon profit. 3. 02It is permissible to make the promise binding upon the Client to purchase from the Bank, that is, he is to either satisfy the promise or to indemnify the damages caused by breaking the promise without excuse. 3. 03It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify the damages. 3. 04It is also permissible to document the debt resulting from Bai-Murabaha by a Guarantor, or a mortgage, or both like any other debt.

Mortgage/ Guarantee/ Cash Security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement. 3. 05Stock and availability of goods is a basic condition for signing a Bai-Murabaha Agreement. Therefore, the Bank must purchase the goods as per specification of the Client to acquire ownership of the same before signing the Bai-Murabaha agreement with the Client.

After purchase of goods the Bank must bear the risk of goods until those are actually sold and delivered to the Client, i. e. after purchase of the goods by the Bank and before selling of those on Bai-Murabaha to the Client buyer, the Bank shall bear the consequences of any damages or defects, unless there is an agreement with the Client releasing the Bank of the defects, that means, if the goods are damaged, Bank is liable, if the goods are defective, (a defect that is not included in the release) the Bank bears the responsibility.

The Bank must deliver the specified Goods to the Client on specified date and at specified place of delivery as per Contract. 3. 8The Bank shall sell the goods at a higher price (Cost + Profit) to earn profit.

The cost of goods sold and profit mark-up therewith shall separately and clearly be mentioned in the Bai-Murabaha Agreement. The profit mark-up may be mentioned in lump sum or in percentage of the purchase/cost price of the goods. But, under no circumstances, the percentage of the profit shall have any relation with time or expressed in relation with time, such as per month, per annum etc. 3. 09The price once fixed as per agreement and deferred cannot be further increased. 3. 0It is permissible for the Bank to authorise any third party to buy and receive the goods on Bank’s behalf. The authorisation must be in a separate contract.

Request potential Client to open an Al-Wadia Current Account. Let him maintain the Current Account satisfactorily for a reasonable period. (This will generally mean six months). 4. 02Hold preliminary discussion with the prospective Client regarding his Investment needs and business experience. 4. 03Brief him on the salient features of “Bai-Murabaha” Mode of Investment.

Apprise, in particular, the usual terms and conditions under which the Bank makes such Investment. 4. 04Look to the past performance of the Client. Check-up Head Office Current Investment Policy and Branch’s track record of Bai-Murabaha Investment of the item(s). 4. 05If the Proposal is found suitable, advise the Client to submit formal Application (F-167A -as per specimen at page 34). If not found suitable, regret politely.