Understanding Islamic Finance - Doha Academy of Tertiary Studies

Murabaha and Musawamah 235Goods/asset have been used bycustomer before offer and acceptance;do not exist when Murabaha isexecuted, so non-Sharī´ah-compliant.In transit, risk of destruction of goodsbefore offer and acceptance withoutagent’s negligence.Overdue.Default risk.Supplier may not perform hisobligation.Purchase from or resale toassociates/subsidiaries.Reducing the time interval when offer is tobe made periodically; physical inspectionof goods on a random basis.During transit, goods are owned by thebank and all risks belong to the bank. Thisrisk can be mitigated through obtainingTakaful cover.Undertaking from the customer is obtainedto give a certain amount to charity in thecase of late payment.Securities/collateral can be realized torecover loss.The agent, in his personal capacity, canguarantee the performance of the supplier.Obtain related party information from thefinancial statements of the company or byany other source.Box 9.2:Possible Steps for Murabaha in Import FinancingStep 1: TheIslamicbankandthecustomerwillsignamastermurabahaagreement(MoU)and an agency agreement; as per the agency agreement, the customer will purchase goodsfrom foreign suppliers on the bank’s behalf by opening L/Cs with the bank.(The difference between a general Murabaha agreement and a sight L/C Murabahaagreement is that it is possible in sight L/C Murabaha that an item may be sold at cost pricein the case of a spot Murabaha. In order to accommodate such a transaction, the agreementneeds to mention that it can be covered both under Murabaha and Musawamah.)Step 2: The customer will negotiate a deal with some foreign supplier (exporter) forthe purchase of assets as agent of the bank. It should be ensured that such a dealshould be finalized only after execution of the agency agreement.(Otherwise, it could be a problem for the bank in the case of sight L/C; if thecustomer delays in making payment, the bank will have to suffer the loss, as it wouldnot be able to earn any profit on the amount paid to the exporter through the negotiatingbank.)Step 3: The importer will request the bank to open an L/C by submitting all relevantdocuments. Takaful should be arranged by the importer on behalf of the bank (cost tobe borne by the bank) and the relevant policy should be forwarded along with the L/Capplication form. The bank will issue an L/C in the favour of the beneficiary (exporter).