Trade Finance 55The mark-up is usually calculated by reference to a benchmark that is a
conventional interest rate, such as the London Inter-Bank Offer Rate
(LIBOR). The arguments that are currently put forward to support this
practice are usually twofold; the first is a technical argument, which is that
it is possible to use any benchmark as part of a mathematical calculation to
produce the return on an Shari’a-compliant product. The position taken by
most Shari’a Supervisory Boards is that provided the relevant clause is
carefully drafted to provide that a return is calculated by reference to a
formula that includes an interest rate benchmark, but does not say that the
return is interest, such an approach is Shari’a compliant. The better position
is that the reference to an interest rate is acceptable based on the Shari’a
grounds of necessity or public need because, at present, there is no viable
Shari’a-compliant alternative.
In essence, therefore, amurabahainvolves the Islamic financier purchas-
ing assets and then selling them to its customer on a deferred payment basis
(cost plus formula), and with title and possession passing to the customer
immediately.
It is of critical importance, however, that from a Shari’a perspective, there
is clear evidence that assets have been acquired by the Islamic financier and
then onward sold to the customer. This can be achieved through bills of sale
or other documents that show legal title passing. If there are no assets being
bought and sold, then the transaction will be void under the Shari’a as all
that is happening is that a shamconventional loan isbeing extended.Advanced features and issues
Acting as an agent
The reality is that it will be the customer and not the bank that has a
relationship with the supplier, and will be in a better position to negotiate
with the supplier details such as the specifications and the price. In view of
this, the customer will often be appointed as the agent of the Islamic
financier to purchase the assets on its behalf.
Themurabahaagreement will usually have a mechanism whereby the
customercansendanoticetotheIslamicfinancierdetailingthespecifications
and price of the goods it is willing to purchase as an agent from the supplier
and then itself purchase from the Islamic financier. If the Islamic financier
wants to proceed (and usually it will not be required to do so, if an event of
default has occurred), it will accept the notice and this will trigger the
agency arrangements.
In these circumstances, it is important from the Islamic financier’s
perspective that it has some assurance that the customer will actually buy
the assets once they have been purchased from the supplier. While in
practice the purchase by the Islamic financier of the assets (through the
customer acting as its agent) and the onward sale by it to the customer will