Murabaha

A sale transaction where PKIC-IFD purchases the commodity or asset through its customer (Agent) and sells it to the Customer on (deferred or spot payment) Cost-Plus basis (Murabaha). In Murabaha, seller is required to disclose the cost component of the price.

Therefore, the PKIC-IFD, rather than advancing money to a borrower, buys the goods from   a third party through agent and sells those goods to the customer on profit.

A question may be raised that selling goods on profit (under Murabaha) and charging interest on the loan (as per the practice of conventional banks) appears to be one of the same things and also produces the same results. The answer to this query is that there is a clear difference between the mechanism/structure of the product. The basic difference lies in the contract being used. Murabaha is a sale contract whereas the conventional finance facility is an interest-based lending agreement and transaction. In case of Murabaha, the PKIC-IFD sells an asset and charges profit which is a trade activity declared halal (valid) in the Islamic Shariah. Whereas giving loan and charging interest thereupon is pure interest-based transaction declared haram (prohibited) by Islamic Shariah.

Business need

 Murabaha is typically used to facilitate the short-term financing requirements of the customer. The following are the uses of Murabaha:

  1. Purchase of raw material, goods and merchandise of all kinds and description
  2. Purchase of equipment
  3. Other financing of working capital nature

 

Essential Shariah Requirements

  1. Genuine fresh purchase from a distinct supplier.
  2. The subject matter of sale must exist at the time of the sale
  3. The subject matter should be in the ownership, either actual or constructive, of the seller at the time of sale
  4. The sale must be instant and absolute
  5. The subject matter should be a property having value
  6. The subject matter of sale should not be a thing used for an un-Islamic purpose
  7. The subject matter of sale must be specifically known and identified to the buyer
  8. The delivery of the sold commodity to the buyer must be certain and should not depend on a contingency or chance
  9. The certainty of price is a necessary condition for the validity of the sale. If the price is uncertain, the sale is void.
  10. The sale must be unconditional.