54 Islamic Finance in Practice
Transfer of title
Subject to the exceptions mentioned above, title and possession of the sold
assets must pass when theagreement is entered into.Halal goods
The assets being sold must behalal– in other words they must not fall
within categories that are prohibited by Shari’a, such as pork, alcohol,
munitions, etc.Purchase price
Subject to the exceptions mentioned above, the purchase price can be paid
after title to the assets has passed. However, the price must not be calculated
in a manner that includesriba. Whileribais often referred to as interest, it
is wider than this; it can cover any return that is based upon the mere use
of money, and which is calculated by reference to the passage of time.Murabaha
Murabahais the most commonly encountered Islamic trade finance product.
It can be used to finance goods and also (in a non-trade finance capacity) to
create a form of working capital facility (tawarruq). However, many Shari’a
scholars do not approve oftawarruq.Basic parameters
The customer will require assets for use in its business operations. With a
conventional bank, the customer would obtain a loan and the bank would
take security over the financed assets until such time as the loan was repaid.
The approach taken withmurabahais fundamentally different, and the
difference is due to it being a saleand purchase agreement.
Undermurabaha, the Islamic financier will purchase the assets in its
name from the supplier and sell them to the customer. While title and
possession will pass to the customer when themurabahais entered into, the
arrangements will only require the customer to pay the purchase price after
a period of time. This period will usuallybe fairly short, such as 180 days.
The purchase price will be calculated by reference to the price that the
Islamic financier paid to the supplier together with a mark-up. That mark-
up will take into account the fact that the customer will only pay the
purchase price to the Islamic financier on a deferred payment basis.