TRANSECTION HIRARCHY OF MURABAHA

1. Murabaha facility agreement

2. Purchase requisition order
3. Purchase advise
4. Information Memorandum/declaration
5. Offer & acceptance for Murabaha

1. MURABAHA FACILITY AGREEMENT:

Purpose:
Since conventional bank allow cash finance/running finance/demand
finance as one year short term loan facilities, thus Islamic bank is also
required to satisfy that financing limit is available to the customer

Islamic Bank has to prove that the bank deals as financial

intermediaries.

Party Relationship:
Shariah status bilateral promise to witness that Islamic bank promised
with the customer to “finance” raw material, tradable goods to the
customer.

Bank’s Status:
Promisor

Customer’s Status:
Promisee

Risk Involved:
In the absence of any financing agreement i.e. Murabaha facility
agreement the SBP auditors will deem (Ikhtiar) the sale purchase of
goods between Islamic bank & customer as trading has been carried
out by Islamic bank as trader.

a. The reason being a law sub section “ee” of section “7” of BCO
1962 is violated.
b. Many terms & conditions need to linked out for example;
i. Maximum amount of finance available to the customer to
maximum extent of annual raw material/tradable goods.
ii. Maximum tenure of each Murabaha contract needs to be
agreed upon. Almost all Islamic banks do not allow
Murabaha beyond 180 days tenure. The reason being
Murabaha contract selling price consist of cost & profit.
Once the selling price is fixed cannot be changed.
 Risk Mitigation:
Islamic bank should execute agency agreement first & simultaneously
Murabaha facility agreement with sanction advice/ offer letter should
be subject to the execution of both above said agreement.

2. Purchase requisition order

Purpose:
To confirm that agent requires purposing some specific goods mention
on purchase requisition, thus Islamic bank become able to know what
goods are going to be purchased by agent.

Party Relationship:
Islamic Bank is the principal & client is agent.

Status of Relationship:
Agency

Risk Involved:
If purchase requisition or purchase order is not submitted by the agent
“in time”, there is a risk that Islamic bank may be classified as “acting
against law” Means Islamic bank is acting (Sub section I ee) of banking
compliance order 1962. This sub section prohibited the commercial
bank to act as trading house this Islamic bank does not receive ant
purchase /order from the customer as agent and goods are purchased
then sub section ee of section 7 of BOC 1962 is violated by Islamic
bank.

Risk Mitigation:
In case of finance related business purchase order application
received by Islamic bank.

3. Purchase advice

Purpose:
To restrain the agent to purchase goods without principal authority.

Party Relationship:
Islamic Bank is the principal & client is agent.

Status of Relationship:
Agency

Risk Involved:
If purchase advice is not issued by Islamic bank in time /before
purchase of goods, the agent by issuing just a purchase requisition
 /order may purchase some dangerous goods which risk is borne by
Islamic bank.

Risk Mitigation:
Islamic bank should issue purchase advise before the goods are
purchased by Islamic bank.

4. Information Memorandum/declaration

Purpose:
To bind the agent to inform the principal immediately after the goods
are possessed by the agent.

Party Relationship:
Islamic Bank is the principal & client is agent.

Status of Relationship:
Agency

Risk Involved:
If information memorandum declaration is not issued “in time”
immediately after the goods possessed by the agent, the goods may
be consumed by the agent in its possession before the information
memorandum / declaration is issued by the agent, thus once the goods
have been consumed that do not exist accordingly consequently no
sale purchase of such goods can be executed which do not exist,
however by neglecting this Shariah principal any act for the sale
purchase of such goods will render such type of sale as void.

Risk Mitigation:
Compute average raw material consumption period in term of days for
each respective client.

= Average stock or stock value at any particular point in time

Average consumption of raw material per day

For example:

45 days = x
842,000/360

x = PKR 103,808

This 45 days period will be become bench mark, under which we must
take information memorandum/ declaration from the agent.
However, there should be a concrete product policy to monitor that;
 a. in case of locally manufactured goods there should not be lapse
of 15 days from the date the pay order/ demand draft is issued
by the Islamic bank and declaration is issued by agent.

b. In case of imported goods, there should be 15 days from the

date the LC is established by Islamic bank as opening/ issuing
applicant bank & information memorandum declaration is issued
by the agent.

5. Offer & acceptance for Murabaha

Purpose:
To execute sale purchase between the Islamic bank & client for the
goods, possessed by client as agent of Islamic bank.

Relationship:
Islamic Bank is the seller & client is buyer.

Risk Involved:
If sale is not executed in time, then Islamic bank involve in a risk of
executing Murabaha contract for the goods which don not exist. The
reason being the client feels comfort while consuming the goods in its
possession that the issuance of information memorandum/declaration
was the enough sufficient document to consume the goods.

Further, normally Islamic bank wait for receiving of commercial

invoice/sale tax invoice as an evidence of ownership to execute sale of
Murabaha with the customer.

Any other document which proves that ownership has been taken by
Islamic bank should be used to avoid “void” contract of Murabaha.
Such documents in case of local manufactured goods are;

a. Railway/truck receipt
b. Goods dispatch note issued by supplier
c. Goods received note, being prepared at client premises.

Whereas in case of import goods, receiving of bill of lading is a first

class document evidencity the ownership of Islamic bank.

There are two kinds of possession;

a. Physical
b. Constructive
 Physical possession is “Qubza-e-Haqiqi”, whereas Constructive
possession is called “Qubza-e-Ma’anvi”, through this kind of
possession over goods is taken through a documents evidencing the
transfer of ownership.

Risk Mitigation:
Immediately after receiving the information memorandum/declaration
from the client Murabaha contract should be executed on the same
day based on constructive possession, now on this stage following
conditions of a valid sale are fulfilled;

CANDITION OF VALID SALES:

• Parties to the contract for making offer & acceptance.

• Ownership of the subject matter with the seller.
• Possession over the goods must be with the owner of the goods
physical or constructive (free charge having full information that there is no
claim of ant third party over the goods like Mortgage, pledge,
hypothecation charge).
Price (saman) / Lawful Consideration.