MURABAHA FINANCING

MURABAHA

 Murabaha is a particular kind of sale and not a financing in its origin.

 Where the transaction is done on a “cost plus profit” basis i.e. the seller discloses the cost to the buyer and adds a certain profit to it to arrive at the final selling price .

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BASIC RULES FOR MURABAHA FINANCING

Asset to be sold must exist.

Sale price should be determined.

Sale must be unconditional.

Assets to be sold: a) Should not be used for un Islamic purpose.

b) Should be in ownership of the seller at the time of sale; physical or constructive.

 Re- negotiation of price and roll over of Murabaha are not permitted.

 Discounting of Murabaha Instruments is not permitted.

DOCUMENTATION

 CNIC  E-CIB  Master Murabaha Financing Agreement      Agency Agreement Order Form / Draw Down Notice Declaration Purchase Evidences Demand Promissory Note

MASTER MURABAHA FINANCING AGREEMENT

(MMFA)

 It is an agreement between the client and the Bank whereby the client agrees to purchase goods from the bank from time to time as per the terms and conditions of this agreement.

 This is an overall facility agreement under which various Sub-Murabahas may be executed from time to time.

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AGENCY AGREEMENT

Through this agreement, the bank appoints customer as its agent to select and procure specified goods for the bank.

 This agreement needs to be signed once between the client and the bank to cover the specified agency period. The disbursement of funds is done under this agreement.

 The customer should define a comprehensive list of assets and commodities that he may procure during the course of business from time to time.

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ORDER FORM

This document is executed at the time of each sub murabaha request i.E. Each time when the customer requires murabaha for purchase of assets.

 Through this document customer requests the bank to purchase the assets from the supplier and undertakes that it will purchase the assets from the bank once the bank acquires them from the market.

 The customer also undertakes to compensate for the actual loss the bank may suffer in case that he fails to purchase the assets from the bank.

DECLARATION

 Declaration is to be signed by the customer immediately after the purchase of goods as Bank’s agent.

 This document establishes the actual sale transaction, i.e. transfer of ownership of goods from the Bank to the customer.

 At this stage the specific details of the assets must be known i.e. quantity, quality, cost etc.

 Purchase Evidences in the form of bills, sale invoice and sales tax invoice must be furnished along with the Declaration.

 Proper timing of declaration is extremely important especially in cases of perishable or immediately consumable commodities.

PAYMENT SCHEDULE

 The Payment Schedule specifies the amount that the Client will make from time to time or at once towards the payment of Murabaha price.

 This shall be executed after the execution of Declaration.

 The dates mentioned in the schedule correspond to the day when the payment becomes due on the client.

IMPLEMENTATION OF MURABAHA

Steps of Implementation of Murabaha Financing          Customer Purchasing Cycle Inventory holding period Inventory holding method Payment terms to supplier Mode of Payment Storage / warehousing facility Physical Inspection Timing of Offer/Acceptance Other industry/goods specific parameters

CASE

• • Hira textile mill limited was incorporated in 1991 as a public limited company. The registered office of the company is situated at 44 – E/ 1 Gulberg 3 Lahore. They are running the business very successfully as shown above.

The client has approached Alfalah Bank Limited for Murabaha Facility amounting to Rs. 10 million for purchase of cotton bales as they have received a big order.

STAGE 1

 Master murabaha finance agreement and agency agreement with hira textiles after limit approval.

 Hira textiles requests via order form for the purchase of cotton bales.

STAGE 2

 Alfalah Bank Limited appointed the Hira Textiles as their agent to purchase the cotton bales with Agency Agreement  Alfalah Bank Limited issue Purchase order along with Pay Order in favor of local supplier for purchasing of cotton bales  After purchasing the Raw Material hira textiles will intimate Alfalah Bank Limited along with asset description and Invoices.

Letter of request /order form

Date: 22-12-2010 Alfalah Bank limited Dear sir, In pursuance of my/our acceptance of the terms and conditions as per your facilities offer letter No. dated Marabaha Financing agreement dated and Agency Agreement dated , Master I/we hereby request you to kindly arrange the purchase of the following goods/commodities: Sr. No.

1 Description of Goods/Commodities Cotton bales Quantity Other Specifications Cost Rs 7M 2 Other Raw Material 3M Note: The Goods are available for sale with M/s Authorized signatures Name/Company/firms Total Rs. 10 M

STAGE 3

 Hira Textiles will submit Declaration along with summary Payment Schedule.

 After physical inspection Alfalah Bank Limited will accept Declaration and will issue Delivery Order along with Transfer Letter in favor of Hira Textiles

STAGE 4

 On the due date Hira Textiles will pay the Contract price of Murabaha Facility to Alfalah Bank Limited.

CONTRACT PRICE Contract Price = 10 M * (1+ (k + 3.5%))

ALFALAH BANK LIMITED DECLARATION FOR MURABAHA TRANSACTION

Date: Alfalah Bank Limited Lahore With reference to our Agency Agreement dated ,I/we hereby confirm that I/we have purchased the below mentioned Assets on behalf of yourselves for Rs. also confirm that I/we have inspected the said Assets and found the same to be exactly confirming to the quantity specified in our letter of request dated .

And have taken the delivery thereof from the supplier.I/we

S. No.

1 2

Date Description

Cotton Bales Other Raw Material

Quantity Value in Rs

Rs. 7 M Rs. 3 M Total Rs.

Rs. 10 M I/we am/are now interested to purchase the abovementioned Assets from your selves on spot/deferred payment basis for a period of as the same Assets are suited to my/our needs. Your requested kindly inform me/as the sale price of the aforementioned Assets. Authorized signatures

MURABAHA TRANSACTION VERIFICATION FORM

We have verified the goods as mentioned in the schedule below purchased by our agent M/s reference to Agency Agreement dated , the goods were verified.

with Physical Constructive

√ Serial No.

schedule

1 2 Cotton Bales Other Raw Material

Description of goods Value in Rs.

Rs. 7 M Rs. 3 M

On behalf of Alfalah Bank Ltd

Name: Designation: Signatures: Date: Total Rs. 10 M

On behalf of Customer

Name: Designation: Signatures: Date :

DEMAND PROMISSORY NOTE

On demand I / we , promise to pay Alfalah Bank Limited transacting alla, Islamic Banking in Pakistan. Or order sum of money of Rs. (Rupees only) for the value/consideration received.

Date .

For and on behalf of CUSTOMER NAME Hira Textile Mill Authorized signatures Witnesses: 1. . 2. Name: Name: NIC No: NIC No: Address: Address: .