16 Background to Islamic Finance
whereby the seller is obliged to disclose to the buyer the cost of the goods
sold on either spot basis or deferred payment basis, and a profit margin is
included in the sale price. It is suitable for corporate,consumer, agriculture,
microfinance and other sectors where the client needs finance to purchase
goods. It enables the client to procure finished goods, raw material,
machinery or equipment through Islamic banks from the local market or
through import. Normally, it is used for short-term financing needs, as
Islamic banking institutions are able to fix a price at the outset to finance
the purchase of goods for onward sale to their clients.
Some important considerations in amurabahaare as follows:- The commodities, which are the subject of the sale, must be existing,
owned by the bank (as seller) and in the bank’s physical or constructive
possession. Therefore, it is necessary that the bank must have first
assumed the risks of ownership before selling the commodities to the
client; - The execution of the sale contract requires an offer and acceptance, which
includes certainty of price, the place of delivery and the date on which the
price, if deferred, will be paid; - The appointment of an agent, if any, and the purchase of goods by/for and
on behalf of the bank and the ultimate sale of such goods to the client
shall be transactions independent of each other, and shall be separately
documented. The agent should first purchase the commodity on behalf of
the bank (ie. the financier) and take its possession thereof. Subsequently,
the client would purchase the commodity from the bank through an offer
and acceptance arrangement; - The commodity will remain at the risk of the bank during the period of
purchase of the goods by the agent and its ultimate sale to the client
(buyer) and until its possession by the client; - Once the sale transaction is concluded between the bank and the client,
the agreed selling price cannot be changed; - It can be stipulated while entering into the agreement that in case of late
payment or default by the client, the client will be liable to pay a penalty
calculated at an agreed percentage rate per day or per annum that will go
to a charity fund constituted by the bank; - The buyer/client may be required to furnish security in the form of a
pledge, lien, mortgage or any other form of encumbrance on realizable
assets. However, the mortgagee or the charge-holder shall not derive any
financial benefit from such security; and
•Amurabahacontract cannot be rolled over because once sold by the bank,
the goods become the property of the client, and hence cannot be resold.
Murabahareceivables cannot be securitized for creating a negotiable
instrument to be traded in a secondary market.