EDUCATION/ FAQ on Murabaha

For accounting purposes, how is profit recognised in a Murabaha transaction?

Since Murabaha is a cost-plus sale, profits are measurable and known at the contract date. Therefore, it is permissible to accrue the total amount of profit from a transaction on the date on which the Murabaha contract was executed.

Is it permissible to set a time period for a Murabaha sale contract made with a promising buyer?

It is permissible to set a time period for a Murabaha sale contract made with a promising buyer if agreed upon by both parties.

In a Murabaha transaction, is the seller obliged to sell the asset to a client who, after promising to purchase, becomes insolvent?

In case the seller comes to know of a client’s insolvency before delivery of the asset he has the right to withhold delivery.

Is it permissible to benchmark Murabaha instalments on the market price of the goods prevailing at the due date of each instalment?

It is not permissible to benchmark Murabaha instalments on the current market price of goods. A Murabaha is a sale of goods in which the cost and profit is unambiguously decided at the time of contract.

Is it permissible to make the profit rate in a Murabaha contract contingent upon the period of repayment?

It is permissible to make profit contingent upon the repayment period. However, the amount of profit should be decided at the time of contracting. In other words, this entails that, at the time of contracting, the client be given an option of different repayment periods, each with different profit rates from which the client may select one.

In case goods imported by a bank under a Murabaha agreement are delivered before the shipping documents, is it permissible for the bank to deliver the goods to its client?

It is permissible for the bank to deliver the imported goods bought under a Murabaha agreement to the client in case they arrive before the shipping documents. In such a case, the bank is required to issue a customs clearance certificate to the client. In order for the issue of such a certificate to be valid, the following conditions should be met: The documentary credit should be in the name of the bank; the invoice should be in the name of the bank; the documentary credit should require the beneficiary to notify the bank of the details of the shipment and invoice. In case the client requests the issuance of customs clearance certificates while the bank has not received notification from the beneficiary, the bank will endeavour to obtain such notification. The customs clearance certificate should not be issued before the receipt of such notification, except to avoid imminent harm. Furthermore, it is permissible in such a case to change the mode of sale from Murabaha to a bargaining sale. Since documents have not arrived and cost is not decisively known, both parties may bargain to a suitable price.

Is it permissible to confiscate earnest money received if the promising buyer defaults in purchasing goods?

It is permissible to confiscate earnest money in such a situation, provided that this was mentioned in the Murabaha contract.

Is it permissible to make the profit on Murabaha contracts contingent upon the time the customer takes to make payment?

It is impermissible to link profit to time. Profit is part of the Murabaha price and cannot be separated over time. It is permissible to take into consideration the time a particular client takes to make payment for future dealings with that client.

A client approaches a bank to buy goods under a Murabaha. The buyer agrees to buy the goods at a price less than the market value. At the same time, the buyer contacts the owner of goods and promises to pay the difference between the sale price and market price. Is such a transaction permissible?

The transaction described in the question is not permissible, as it amounts to an interest-based financing by the bank. If the bank becomes aware of such an agreement between the client and owner of goods, it should refuse to provide financing.