rules of bai muajjal (sale on deferred payment basis)

Rules of Bai Muajjal (sale on deferred payment basis)

1.Bai Muajjal is valid if the payment date is agreed upon

Payment date can be fixed by

• date (e.g. 1st November)

• time (e.g. 3 months)

But it cannot be fixed to an event, the occurrence of which is uncertain

2. The deferred price may be more than the fixed price But it must be fixed at the time of sale.

Once the price is fixed it cannot be increased in case of late payment or decreased in case of earlier payment.

In order to pressurize the buyer for timely payment the buyer may be asked to promise that in case of late payment he will donate a certain sum to charity

In this case, the seller will receive the money from buyer and use it for charitable purpose

Bai Muajjal

3. If the sale is made on installments the seller may put a

condition that in case of default in a single payment, the seller

may ask for full repayment of balance installments

4. In order to secure the payment, the seller may ask the buyer to deposit a security as surety

5. The seller can also take a promissory note from the buyer, but this note cannot be traded at any value other than par

Bai Muajjal

Murabaha

• Islam prohibits charging interest on money, but permits charging profit on sale of goods

• Therefore, a sale-based transaction (Murabaha) can be used instead of loan-based transactions for financing purchase of assets by clients, especially for working capital requirements

• Over 60% of all business volume of Islamic banks comprises of Murabaha transactions

Murabaha is a particular kind of sale

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

The distinguishing feature of Murabaha from ordinary sale is- The seller discloses the cost to the buyer- And a known profit is added

Murabaha

The profit may be added

•On a lump sum basis

•As a percentage of cost

Payment of Murabaha price may be1) At spot2) In installments3) In lump sum after a certain time

Hence, Murabaha does not necessarily imply the concept of deferred payment

Murabaha

•Murabaha is simply a sale transaction

•Which is being used by Islamic Financial institutions as a mode of financing

•The validity of Murabaha financing transaction depends on whether conditions imposed by Shariah are being met

Since Murabaha is a sale transaction

Rules of Shariah regarding sale should be understood to judge if a Murabaha transaction is valid

We will now have a look at rules of sale in Islamic Shariah

Murabaha

Basic rules for MURABAHA financing

1. Asset to be sold must exist.

2. Sale price should be determined.

3. Sale must be unconditional.

4. 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.

c) should be in physical or constructive possession of the seller

Murabaha

Bank purchases goods from the vendor and sells

them to the client on deferred payment basis.

Option-1

Delivery of goods to Client

Payment to vendor

Vendor

Bank Client

Murabaha

Step by step Murabaha financing

1. Client and bank sign an agreement to enter into

Murabaha.

ClientAgreement to

Murabaha

Bank

Murabaha

Option - 2

2. Client appointed as agent to purchase goods on

bank’s behalf


Agreement to Murabaha

Agency

Agreement

Bank Client

Murabaha

3. Bank gives money to client for purchase of goods.


Agreement to Murabaha

Agency Agreement

Disbursement to the client

Islamic Bank Bank Client

Murabaha

4. Client purchases goods on bank’s behalf and takes

their possession.


Client purchases goods and takes possession

Transfer of Risk Vendor

Bank Client

Murabaha

5. Client makes an offer to purchase the goods

from bank.


Offer to purchase

Bank Client

Murabaha

6. Bank accepts the offer and sale is concluded.


Murabaha Agreement +

Transfer of Title

Bank Bank

Murabaha

7. Client pays agreed price to bank according to an

agreed schedule. Usually on a deferred

payment basis (Bai Muajjal)


Payment of Price Bank Bank

Murabaha

1. Securities against Murabaha/Guaranteeing the Murabaha

• Once the sales transaction is over, the Murabaha price is a debt payable

by the client and can be secured like any other debt

• Hence, one can take a security or guarantee for Murabaha repayment

2. Rollover in Murabaha

• Rollover in Murabaha is not possible since each Murabaha transaction is

for a particular asset. A new Murabaha can only be executed for the

purchase of a new asset.

Rebate on early payments and penalty on late payments

• These are normally prohibited by Shariah Board since they make the

Murabaha transaction similar to conventional debt.

Issues in MurabahaMurabaha

•Can only be used for financing of assets, not operating expenses.

•Asset should be clearly specified.

•Cannot be done for assets already purchased

Murabaha is a package of different contracts

And the sequence of their execution is important

Issues in MurabahaMurabaha

rules of bai muajjal (sale on deferred payment basis)

Documents