History of Islamic Banking in Pakistan

C,x7ik y7ku`w2History of Islamic Banking in Pakistan

Efforts to Islamize the economy of Pakistan started in the mid 60s. However a significant attempt

was made in the mid 80s1 to convert the banking system to an Islamic banking system. The

Banking Companies Ordinance (BCO, 1962) was amended to accommodate non-interest based

transactions and the industry was given a specific timeline to convert to the non-interest based

system. In early 90s, the whole exercise was challenged in the Federal Shariat Court which

declared some products and processes being used by the banking system un-Islamic.

Prior to the re-launch, to study the experience of different countries in Islamic banking, a

delegation from Ministry of Finance (MoF), led by Advisor to Finance Minister, Dr. Tariq

Hassan visited Malaysia, Egypt and Saudi Arabia in September 20012. Based on the

recommendations of this delegation and the past experience of SBP, the policies for promotion

of Islamic banking were formulated. Accordingly, State Bank of Pakistan issued detailed criteria

for setting up of Islamic banks in December 2001.

Al-Meezan Investment Bank Limited applied under the criteria issued by SBP to convert itself

into an Islamic commercial bank. They were issued a license in the name of Meezan Bank

Limited to operate as full-fledged Islamic bank in January, 20023.

Current Status of Islamic Banking Industry in Pakistan

As at end of the year 2003 only one bank operated as a full-fledged Islamic bank and three

conventional banks were operating Islamic banking branches. Today there are 6 full fledge

licensed Islamic banks (IBs) and 12 conventional banks have licenses to operate dedicated

Islamic banking branches (IBBs).4

The total assets of the Islamic banking industry are over Rs. 225 billion as of 30th June, 2008

which accounts for a market share of 4.5% of total banking industry assets. The market share of

deposits stands at 4.2%. Total branch network of the industry comprises of more than 330

1 Aurangzeb Mehmood, “Islamisation of Economy in Pakistan: Past, Present and Future” Islamic Studies.

2 Strategic Plan for Islamic Banking Industry of Pakistan, by Islamic Banking Department of State Bank of Pakistan

3 www.meezanbank.com

4 PAKISTAN ISLAMIC BANKING: PAST, PRESENT AND FUTURE OUTLOOK Bu Dr. Shamshad Akhtar (Governor State Bank of Pakistan, 11 September 2007)

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branches with presence in over 50 cities & towns covering all the four provinces of the country

and AJK5.

Islamic Banking Products

Islamic Banking Institutions of Pakistan are

offering a wide range of compliant products &

services. Murabaha is dominating the financing

portfolio of Islamic Banking Institutions (IBIs),

Similarly, Ijara, Musharaka and Diminishing

Musharaka are also used noticeable share in total

financing of IBIs. However, Mudaraba, Salam

and Istisna portfolios still needs to be triggered.

Murabaha

Originally, Murabaha was a particular type of sale and not a mode of financing. The ideal modes

of financing according to Shariah are Mudaraba or Musharaka. However in the perspective of the

current economic circumstance there are certain practical difficulties in using Mudaraba and

Musharaka as instruments in every type of financing. Therefore, the contemporary Shariah

experts have allowed, subject to certain conditions, the use of Murabaha on a deferred payment

basis as a mode of financing.

MURABAHA is a particular kind of sale in which seller honestly discloses the cost incurred on

the sale of commodities to be sold and sell to the buyer at disclosed cost plus mutually agreed

profit margin ratio. The agreed profit ratio varies from bank to bank. MURAHABAH is being

used to purchase any tangible asset: Real Estate, Stocks, Machinery, Equipments, furniture,

building materials, vehicles or any identifiable and tangible goods which are in Shariah

complains. More than 60% of Islamic Financing transactions all over the world are through

Murabaha financing.

Scope of Murabaha

Financing of purchasing commodities and goods from the local markets

Financing import and export transactions

Financing fix assets (machines and equipments)

Financing of working capital (purchasing feedstock used for production) 5 www.sbp.org.pk/ibd

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Source: Islamic Banking Bulletin September 2009

Financing construction and installations material purchases

Financing purchasing of real estate (land and building)

The payment of Murabaha price may made

At spot at time of sale

In installments

In lump Sum (Bullet Payment) after a period of time

Difference between Murabaha and Sale

A simple sale in Arabic is called Musawamah - a sale without disclosing or referring to the cost

of goods sold. However when the cost price is disclosed to the client, it is called Murabaha. A

simple Murabaha is one where there is cash payment and Murabaha Muajjal is one on deferred

payment basis.

The Murabaha transaction does not come into existence by merely replacing the ‘interest’ by the

words "profit" or "mark-up". Actually, murabahah as a mode of financing has been allowed by

the Shariah scholars with some conditions. Unless these conditions are fully observed, Murabaha

is not permissible. In fact it is the observance of these conditions which can draw a clear line of

distinction between the interest-bearing loan and the transaction of Murabaha. If these conditions

are not observed, the transaction becomes invalid according to Shariah.

Basic Features of Murabaha Financing

1. Murabaha is not a loan given on interest. It is a sale of a commodity for a deferred price

which includes an agreed profit added to the cost.

2. Being a sale and not a loan, Murabaha should fulfill all the conditions necessary for valid

sale.

3. The financier must have a good title to the commodity before he sells it to his client.

4. The commodity must come into possession of the financier, whether physically

constructively, in the sense that the commodity must be in the risk of the financier even

though the risk may be for a short period.

5. The best way for Murabaha according to Shariah is that financier himself purchases the

commodity and keeps it in his own possession or purchases the commodity through a

third person appointed by him as his agent before he sells it to the customer. However, it

is also allowed that the financier may make the client himself his agent to buy the

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commodity on his behalf. In this case the client first purchases the commodity on behalf

of his financier and takes possession as such. Thereafter, he purchases the commodity

from the financier for a deferred price. His possession of the commodity in the first

instance is in his capacity as an agent of the financier. In this capacity he is only a trustee

while the ownership vests in the financier and the risk of the commodity is also borne by

the financier as a logical consequence of the ownership. However, when the client

purchases the commodity from the financier, the ownership as well as the risk is

transferred to the client.

6. As mentioned earlier, the sale cannot take place unless the commodity comes into the

possession of the seller but the seller can sign an agreement to sell even when the

commodity is not in his possession. The same rule is applicable to Murabaha.

Process Flow and Shariah Compliance

In the light of the aforementioned principles, financial institutions can introduce the

Murabaha mode of financing by adopting the following procedure:

Firstly, The client and the institution sign an over-all agreement whereby the institution promises to sell and the client promises to buy the commodity on an agreed ratio of profit added to the cost.

Secondly

,

The institution appoints the client as his agent for purchasing the

commodity on his behalf and an agreement of agency is signed by

both the parties

Thirdly, The client purchases the commodity on behalf of the institution and

takes its possession as an agent of the institution

Fourthly

,

The client informs the institution that he has purchased the

commodity on its behalf and at the same time makes an offer to

purchase the commodity from the institution.

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Fifthly, The institution accepts the offer and the sale is concluded whereupon

the ownership as well as the risk of the commodity is transferred to

the client.

All the abovementioned five stages are necessary to affect a valid Murabaha sale. The most

essential element of the transaction is that the commodity must remain in the risk of the

institution during the period between the third and the fifth stage. This is the only feature of

Murabaha which can distinguish it from an interest-based transaction. Therefore, it must be

observed with due diligence otherwise the Murabaha transaction becomes invalid according to

Shariah.

1. It is also a necessary condition for the validity of Murabaha that the purchased from a

third party. The purchase of the commodity from the client himself on a buy agreement is

not allowed in the Shariah. Thus Murabaha based on 'buy-back' agreement is more than

an interest-based transaction.

2. The abovementioned procedure of the Murabaha financing is a complex transaction

which the parties involved have different capacities different stages as follows:

(a) At the first stage, the institution and the client agree to sell and purchase a commodity

in the future. This is not an actual sale. It is only a promise to affect a sale in future on a

Murabaha basis. Therefore, at this stage the relationship between the institution and the

client is that of a promisor    and a promisee.

(b) At the second stage, the relationship between the parties is that of a principal and

agent.

(c) At the third stage, the relationship between the institution and the supplier is that of a

buyer and seller.

(d) At the fourth and fifth stages, the relationship of buyer and seller comes into existence

between the institution and the client and since the sale is affected on a deferred payment

basis the relationship of a creditor and debtor also emerges between them simultaneously.

All these capacities must be kept in mind and must come into operation with

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consequential effects each at its relevant stage and these different capacities should never

be mixed up confused with each other.

3. The institution may ask the client to furnish security to its satisfaction for the prompt

payment of the deferred price. It may also ask him to sign a promissory note or bill of

exchange but it must be after the actual sale takes place i.e. at the fifth stage mentioned

above. The reason is that the promissory note is signed by a debtor in favour of his

creditor but the relationship of debtor and creditor between the institution and the client

begins only at the fifth stage whereupon the actual sale occurs between them. 

4. In the event of default by the buyer (client) in respect of the payment of the purchase

price on the due date, the purchase cannot be increased. However, if he has undertaken

in the agreement to pay an amount for a charitable purpose, as mentioned in clause 7 of

the rules of Bai'Mu'ajjal, he shall be liable to pay the amount undertaken to be paid by

him. However, the amount so recovered from the buyer shall not form part of the income

of the seller/ the financier. The financier is bound to spend it for a charitable purpose on

behalf of the buyer (client).

Basic mistakes in Murabaha Financing

Some basic mistakes that can be made in practical implications of the concept are as follows:

1. The most common mistake is to assume that Murabaha can be used for all types of

transactions and financing. This mode can only be used when a commodity is to be

purchased by the customer. If funds are required for some other purpose Murabaha

cannot be used.

2. The document is signed for obtaining funds for a specific commodity and therefore it is

important to study the subject matter of the Murabaha.

3. In some cases, the sale of commodity to the client is affected before the commodity is

acquired from the supplier. This occurs when the various stages of the Murabaha are

skipped and the documents are signed all together. It is to be remembered that Murabaha

is a package of different contracts and they come into play one after another at their

respective stages.

4. It is observed in some financial institutions that Murabaha is applied on already

purchased commodities, which is not allowed in Shariah.

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Murabaha Documents

There are a number of documents involved in a Murabaha financing transaction. The most

essential of these documents are:

Master Murabaha Finance Agreement

Agency Agreement

Purchase Requisition for Purchase of the goods

Detail of Goods to be purchased (To be attached to the purchase Requisition)

Declaration (Confirmation of Goods Purchased, Offer to Purchase and Institution’s

Acceptance)

Schedule Payments for Contract Price

Schedule of Security

1. Master Murabaha Finance Agreement

It’s an agreement between the client and the Bank whereby the client agrees to purchase goods

from the Bank from time to time as per the terms and conditions of this agreement.

This is an overall facility agreement under which various Sub-Murabaha may be executed from

time to time. Hence it needs to be signed once at the time the facility is sanctioned.

MURABAHA FACILITY AGREEMENT (this "Agreement") is made at_____on ___ day of

_____ by and BETWEEN ____________________, (hereinafter referred to as the "Client"

which expression shall where the context so permits mean and include its successors in interest

and permitted assigns) of the one part AND______________________________, (hereinafter

referred to as the "Institution" which expression shall where the context so permits mean and

include its successors in interest and assigns) of the other part.

IT IS AGREED BY THE PARTIES as follows:

1. PURPOSE AND DEFINITIONS

1.01 This Agreement sets out the terms and conditions upon and subject to which the Institution

has agreed to purchase the Goods from time to time from the Suppliers and upon which the

Institution has agreed to sell the same to the Client from time to time by way of Murabaha

facility.

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2. SALE AND PURCHASE OF THE GOODS

2.01 The Institution agrees to sell the Goods to the Client to a maximum amount of

Rs____________ and the Client agrees to purchase the Goods from the Institution from time to

time at the Contract Price. Upon receipt by the Institution of the Client's Purchase Requisition

advising the Institution to purchase the Goods and making payment therefore, the Institution

shall acquire the Goods either directly or through the Agent. The payment for such goods shall

be made by the institution directly to the Supplier on submission of Purchase Advice by the

client/agent….

2.02 Upon receipt of purchase of Goods by the Institution, directly or through an Agent, from the

Supplier, the Goods shall be at the risk and cost of the Institution until such time that these

Goods are sold to the Client…….

2.03 After the purchase of Goods by the Institution, the Client shall offer to purchase the Goods

from the Institution at the Contract Price….

3. SECURITY

As security for the indebtedness of the Client under this Agreement, the Client shall furnish to

the Institution collateral(s)/security (ies)…..

4. FEES AND EXPENSES The Client shall pay to the Institution on demand within 15 days of

such demand being made, all expenses (including legal and other ancillary expenses) incurred by

the Institution in connection with the negotiation, preparation and execution of the Principal

Documents and of amendment or extension of or the granting of any waiver or consent under the

Principal Documents.

5. PAYMENT OF CONTRACT PRICE

5.01 All payments to be made by the Client under this Agreement shall be made in full, without

any set-off, roll over or counterclaim whatsoever, on the due date…..

6. REPRESENTATIONS AND WARRANTIES

a. The Client warrants and represents to the Institution that:

b. The execution, delivery and performance of the Principal Documents by the Client will not

(i) Contravene any existing law, regulations or authorization to which the Client is subject

(ii) Result in any breach of or default under any agreement or other instrument to which the

Client is a party or is subject to, or

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c. The financial statements submitted together with the notes to the accounts and all contingent

liabilities and assets that are disclosed therein represent a true and fair financial position of the

business and to the best of the knowledge of the client, its directors and principal officers, there

are no material omissions and/or mis-repsentations.

d. It shall inform the Institution within business days of an event or happening which may have

an adverse effect on the financial position of the company, whether such an event is recorded in

the financial statements or not as per applicable International Accounting Standards.

7. UNDERTAKING

The Client covenants to and undertakes with the Institution that so long as the Client is indebted

to the Institution in terms of this Agreement:

(a) It shall inform the Institution of any Event of Default

(b) It shall provide to the Institution, upon written request, copies of all contracts, agreements

and documentation relating to the purchase of the Goods;

(c) Except as required in the normal operation of its business, the Client shall not, without the

written consent of the Institution, sell, transfer, lease or otherwise dispose of all or a sizeable part

of its assets, or undertake or permit any merger, consolidation, or re organization which would

materially affect the Client’s ability to perform its obligations under any of the Principal

Documents;

(g) It shall forthwith inform the Institution:

(a) The financial condition of the Client;

(b) Business or operations of the Client; and

(c) The Client’s ability to meet its obligations when due under any of the Principal Documents;

Other clause including in this agreement are:

Penalty, Indemnities, set off, and Force Majeure and the signature of the witnesses on the behalf

of institution and client.

2. Agency Agreement

The client is appointed by the Bank as its agent to purchase goods. This agreement needs to be

signed once between the client and the bank.

The disbursement of funds is done under this agreement. Clients need to fill out the List of

Assets which it will purchase.

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Agency Agreement

With reference to the Murabaha Facility Agreement dated _______________ , we hereby

confirm our agreement to appoint you as our Agent to acquire for our account and benefit goods

of the description to be specified in the purchase requisition which shall be issued from time to

time, under the following terms and conditions;

1. As an Agent of the Institution, you will be responsible to receive the Goods directly from the

Supplier (s) from time to time in terms of Purchase Requisition(s) to be duly endorsed by the

Institution and provide us a declaration confirming acquisition thereof, alongwith a statement

containing relevant details including place of storage.

2. The bank shall prepare a Pay Order/Cross cheque, etc in the name of Supplier that will be

handed over to the Agent. The supplier will issue an invoice in the name of Bank - Account

Client (e.g. ‘1st Islamic Bank – ABC Company’).

3. In case of failure on your part to:-

a) Acquire goods in terms of this agreement and to refund, in consequence, the amount paid by

us (the Institution) therefore, and/or

b) Repay the amount, if any, due from you upon a notice of revocation, if any, served by you in

the manner provided hereunder; you shall become liable to pay a penalty to the institution by

credit to a special Account, separately maintained by the institution, an amount which shall be

5% over the rate announced by SBP for providing short term accommodation to commercial

banks, as on the date of such default by you. This amount will be calculated on the entire amount

due from you, under this Agency Agreement and for the entire period for which the default

subsists. The amount of such penalty shall be utilized by the institution only for the purposes of

charity, in its absolute discretion.

4. The Institution shall have the authority, in its absolute discretion to refuse the disbursement of

funds or to revoke this Agency Agreement at any time., subject to a notice in writing served

given at least 07 days prior to revocation.

5. You may revoke this Agency Agreement by giving a notice in writing of at least 07 days prior

to the date of intended revocation, provided that any amount due by you to the Institution shall

become payable immediately and until such time that any such amount due from you has been

discharged in full, this agreement shall not be deemed to have been revoked.

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6. This Agency Agreement shall remain in force until revoked and shall be governed by the

prevailing laws of Pakistan and the Murabaha Facility Agreement dated _______________. Any

dispute between the parties shall be submitted to a Court/Tribunal of competent jurisdiction in

__________.

Kindly signify your acceptance of the foregoing terms and conditions by signing the duplicate.

For and on behalf of (insert name of the Institution)

AUTHORISED SIGNATORY OF THE INSTITUTION

AGREED AND ACCEPTED

For and on behalf of [insert name]

___________________________________

AUTHORISED SIGNATORY OF THE AGENT

 WITNESSES:   1.________________2. ________________

3. Purchase Requisition

PURCHASE REQUISITION FOR PURCHASE OF THE GOODS

MURABAHA FACILITY AGREEMENT DATED

S.No.___________

Date: ___________

To:

___________________________ [Insert name and address of the Institution]

Dear Sirs,

(1) Please refer to the Murabaha Facility Agreement dated [______] (the "Agreement") between

[insert name of the Client] (the "Client") and [insert name of the Institution] (the "Institution")

(2) All terms defined in the Agreement bear the same meanings herein.

(3) The Client hereby requests you to purchase the Goods from the Suppliers as per the

provisions of the Agreement as follows:

(a) Goods as detailed in Murabaha Document # 3/2:

(b) Cost Price: ____________________

(c) Value Date: ___________________

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(4) Please make arrangements to pay the Cost Price to the account of _______________on the

Value Date in immediately available funds.

(5) All the terms and conditions of the Agreement shall form an integral part of this Requisition.

Yours faithfully,

For and on Behalf of the Client

______________________

INSTITUTION’S INSTRUCTIONS

No._____________

Date: _____________

Dear Sir,

You are hereby instructed to execute the aforesaid Purchase Requisition for and on our behalf in

the manner, to the extent and for the Goods stipulated therein.

For and on Behalf of

______________________ (Insert Institution’s name)

DETAILS OF GOODS TO BE PURCHASED

(To be attached to Purchase Requisition)

Name of Supplier : _____________________  Date:____________

Address: ______________________________________________________________________

4. R E C E I P T

Received with thanks Pay Order/Cross cheque, in the name of Supplier from______________

branch, amounting to Rs.______ (Rupees ___ only) for the purchase of goods in respect of

which a Quotation dated______has been issued by M/S __________.

In the event of failure on the part of the Supplier to supply the said goods within the period

specified in the Purchase Requisition, I/We undertake and agree to refund/reimburse the full

amount of Rs._____________ and all cost and consequences under and in terms of the Agency

Agreement.

For and on behalf of [Insert name of the Agent)

__________________ (Authorized Signatory)

Date: ______________________

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5. Declaration:

Declaration is to be signed by the customer immediately after it has purchased the goods. This

document establishes the actual sale transaction, i.e. transfer of ownership of goods from the

Bank to the customer.

(Part- I) CONFIRMATION OF GOODS PURCHASED

(Part-II) OFFER TO PURCHASE

(Part-III) INSTITUTION’S ACCEPTANCE

6. SCHEDULE OF PAYMENTS OF CONTRACT PRICE

Payment Date Installment Amount

7. SCHEDULE OF SECURITY

Description of Security Nature of Charge

ISSUES IN MURABAHA

Default Case

In the case of default by the buyer in the payment of price at the due date, the price cannot be

increased. However if he has undertaken, in the agreement to pay certain amount for a charitable

purpose, he shall be liable to pay the amount undertaken by him. But this recovered amount from

the buyer will not be considered penalty or compensation, therefore it will not account to

institutions income. Institution is bound to spend it for a charitable purpose on behalf of the

buyer.

Rebates in Early Payment

If the customer makes the payment before the due date and there is no commitment that he

would gain any discount in the price of Murabaha. Then it is permissible for bank to give any

rebate to the client.

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Rises in Prices and Change in Assets

If there is a rise in prices and the amount escalates for which financing is availed then the

transaction can only be executed if the Bank has been informed and the Bank subsequently

accepts the same. The institution reserves the right to reject the purchases if made other then

agreed price. Change of Asset(s) in the agency agreement can be done with mutual consent. If

Agency Agreement is for specific Asset(s) then new agreement is required for changed Asset(s).

Murabaha with Related Parties

In case of Murabaha, the Vendor and the Customer must be independent to each other. Banks are

not allowed to enter into a Murabaha Transaction where Vendor and Customer are associated

parties. Parties are considered to be related parties if one party has 33% or more

shares/ownership in the business of other party.

Delays in the Supply from Supplier

Delay in Supply from the supplier in case where specific time was allowed leads to the

revocation of agency agreement. In such cases the customer will refund the cost of goods.

Rollover in Murabaha

Rollover in a Murabaha Transaction would imply that payment of earlier Murabaha Price by

executing new Murabaha. Rollover in Murabaha is not possible since each Murabaha transaction

is for the purchase of a particular asset.

Purchase Evidence

The customer is required to submit purchase evidence and declaration. The purchase evidence

must confirm that customer as an agent has purchase the goods after agency agreement. The

evidence may be in the form sale invoices, delivery orders or any other receipts etc. In some case

the customers are allowed to submit a purchase summary.

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Risk Management

Risks Solution Agency Risk Pre-inspection and direct payment to the vendor.

Ownership Transfer/Asset Risk Takaful of goods during transit and induce customer to submit declaration immediately after the purchase of goods.

Default Risk Obtain Shariah compliant collateral and adapt staggered payments.

Price Risk Time lag between purchase and offer acceptance should be minimum.

Liquidity Risk Make separate pools for different maturities considering their different maturity dates.

Profitability Risk A charity may be imposed to discourage a delay to make Murabaha repayments.

Shariah Non-Compliance Risk Ensure that relevant staff has appropriate training and has proper knowledge of Shariah principles. Checklist of the sequence may be followed.

Legal Risk Proper documentation and timely checking is required.

Accounting Treatment of Murabaha Transactions

There may be three different cases for payment of Murabaha pricing.

I. Bullet Payment

If Murabaha price is paid in one bullet payment, price can simply be calculated as following

Murabaha Price = Principal+ Principal x Profit Rate x No. of days

= 1,000+ (1,000*.10*1) = 1,100

ii. Payment in Equal Installments

In this case, each payment is comprised of a portion of principal & profit. The payment is

calculated by using IRR (Internal Rate of Return) formula

Installment = [(principal x rate)/ (1-(1/ (1+rate) ^n)]

= [(1,000*.10)/ (1-(1/1.10) ^12)

=

Murabaha Price = Installment x n

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iii. Unequal installments

In such a way, profit part of the selling price is paid over the total tenor of the transaction,

whereas the principle amount is paid at maturity. Price is calculated as following:

. Murabaha Price = Principal amount+ Principal x Profit rate x No. of days

. Interim Installment = Principal x Profit rate x No. of days (days per period)

Transaction Recording

Pre-adoption

1) Murabaha Financings were recorded at the

time of disbursement of funds.

2) Goods purchased but remaining unsold at the

balance sheet date were recorded as ‘Advance

against future Murabaha’.

3) Profit for the Murabaha transaction was

recorded from the date of disbursement.

Post-adoption

1) Funds disbursed for purchase of goods are

recorded as ‘Advance for Murabaha’. On

culmination of Murabaha i.e. sale of goods to

customers, Murabaha Financings are recorded

at the deferred sale price net of profit payment.

2) Goods Purchased but remaining unsold at the

balances sheet date are recorded as Inventories.

3) Profit for the period from the date of

disbursement to the date of culmination of

Murabaha is recognized immediately after the

date of culmination of Murabaha...

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Case Study for Murabaha

Below is the case study for the understanding of Murabaha transactions carried out at ABC Bank

in various scenarios:

Example Amount in Rs. /%

Purchase price/Cost/Principal 1,000

Profit Rate 10%

Tenure One year

Total profit on transaction 100

Sale price (Contract price) 1,100

Date of Disbursement to supplier/customer January 01, 2010

Date of Culmination of Murabaha Transaction January 15, 2010

Date of Maturity of Murabaha December 31, 2010

A-When there is bullet payment of profit and Cost (Principal) at the end of the period:

1) At the time of payment to the client for the purchase of goods on behalf of bank or directly to

the supplier by the bank the transaction will be accounted for as follows:

January 01, 2010

Dr Advance against Murabaha (B/S Asset side)1,000

Cr Pay Order / Party Account (B/S Liability side) 1,000

2) At the Culmination of Murabaha i.e. at the time of sale of goods to the customers with

signing of Declaration by the bank and the client following entries would be passed:

January 15, 2010

Dr Murabaha Financing 1,000

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Dr Unearned Murabaha Profit Receivable 100

Cr Advance against Murabaha 1,000

Cr Deferred Murabaha Income 100

3) Booking of Accrual of profit@ 10% from the date of disbursement to the date of

culmination, the following entry would be passed. [(1000 x 10%) x 15 / 365]:

January 15, 2010

Dr Deferred Murabaha Income 4.10

Dr Murabaha Profit Receivable 4.10

Cr Income on Murabaha Financing 4.10

Cr Unearned Murabaha Profit Receivable 4.10

4) Booking of Accrual of profit@ 10% for remaining days of the month, the following entry

would be passed. [(1000 x 10%) x 16 / 365]:

January 31, 2010

Dr Deferred Murabaha Income 4.39

Dr Murabaha Profit Receivable 4.39

Cr Income on Murabaha Financing 4.39

Cr Unearned Murabaha Profit Receivable 4.39

And so on this entry will be passed at the end of EACH month till maturity for the accrual of

profit.

5) On Maturity of Murabaha transaction i.e. on December 31, 2007 and at the time of

receiving of final payment following entry would be passed:

December 31, 2010

Dr Party Bank A/c 1,100

Cr Murabaha Financing 1,000

Cr Murabaha Profit Receivable 100

Treatment for Inventory

If goods purchased for Murabaha remain unsold on the reporting date they are shown as

“Murabaha Inventory” in Other Assets.

Following are possible scenario:

Bank is holding assets for future sale to its customers against a promise

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The Goods are imported as Bank’s agent and are not sold to the importers

Any other reason due to which the goods remain unsold

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Step by Step Murabaha (Bank Islami)

1. Customer and Bank Islami sing an agreement to enter Master Murabaha Agreement (MMA).

2. Bank Islami makes the payment for the goods to be purchased.

3. Customer pays agreed price to Bank Islami according to agreement, usually on credit based payment for the goods.

If Customer acts as an agent on the behalf of Bank Islami, then

Customer as agent of Bank Islami purchases the goods from supplier and bank Islami pays the price to the supplier. Risk is transfer to the bank.

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Bank IslamiBank Islami CustomerCustomer

CustomerCustomerBank IslamiBank Islami

SupplierSupplier

Transfer of risk

Transfer of Money

Bank IslamiBank Islami CustomerCustomer

Bank IslamiBank Islami CustomerCustomer

MMA

Agency Agreement

Bank IslamiBank Islami CustomerCustomer

MMA

Agency Agreement

SupplierSupplier

PaymentTransfer of Risk

Delivery of G

oodsMMA

MMA

Delivery of goods

Payment

Customer (agent) informs Bank Islami about the purchase of goods and at the same time he/she makes an offer to purchase the goods.

Bank Islami accepts the offer and sale is concluded. Ownership, possession and risk are transferred to the customer. And customer makes the payment.

Murabaha

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Bank IslamiBank Islami CustomerCustomerOffer to Purchase

Bank IslamiBank Islami CustomerCustomer

Offer to Purchase

Ownership, Risk

Payment

Master Murabaha AgreementRelationship Risk Management

Agency Agreement

Hamish JiddiyyahPromisor & Promisee

Takaful (Insurance)Principal and

Agent

Sale Agreement

Delivery of Goods

Seller & Buyer

Debtor & Creditor

SECURITY

Hypothecation of assts

Pledge of goods and or marketable securities

Lien on the deposit

Mortgage on immoveable properties

Bank guarantees and personal guarantees.

Purchase Requisition (Yes)

Purchase Requisition (Yes)

Basic Rules for Murabaha

Breakup of Financing

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Basic Rules for Murabaha

Sale must be

Instant and absolute Unconditional

Existence

Ownership

Possession

Identifiable

Valuable Specific

PriceSubject Matter Possession

Quantified

Certain

Physical Constructive

Financial Highlights of Murabaha in Islamic Banking

BANKS YEAR TOTAL MURABAHA % OF MURABAHA

REVENUES MURABAHA % OF

ALBARAKA   Assets FINANCING FINANCING   SALES Murabaha Sales

  2009 29304960 9667814 32.99% 2555597 1349821 52.82%

  2008 24197826 8562432 35.38% 1764924 1090725 61.80%

  2007 22077113 6994844 31.68% 1493035 764279 51.19%

MEEZAN BANK

  2009 124181734 16645275 13.40% 10102060 5090510 50.39%

  2008 85276070 14590314 17.11% 6803213 4689554 68.93%

DUBAI ISLAMIC BANK

  2009 35368894 2430861 6.87% 3047195 1102381 36.18%

  2008 32050078 2559791 7.99% 2723796 905896 33.26%

  2007 21308247 2205258 10.35% 1119716 308965 27.59%

EMIRATES GLOBAL BANK          

  2009 19762450 3453856 17.48% 1914228 220904 11.54%

  2008 16537387 3150693 19.05% 1060376 18135 1.71%

  2007 8941475 1152289 12.89% 381172 139730 36.66%

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Meezan Islamic Bank

Short Term FinancingUnderlying Islamic Mode MurabahaType of Product Corporate/SMEBasis for Pricing KIBOR Based/Risk Rating/Bank'sLiquidity PositionMinimum Financing Limit NoMaximum Financing Limit as per SBP Prudential Regulations (PRs)Minimum Tenors 7 daysMaximum Tenors 1 YearTarget Customers CorporateSecurity/Collateral Required Cash / MOTD /Letter of Hypothecation/Pledge

ALBARAKA ISLAMIC BANK

Murabaha FinanceUnderlying Islamic Mode MurabahaType of Product Corporate, SME,Basis for Pricing KIBOR based fixed rates for each transaction.Minimum Financing Limit As per PRs and subject to bank's internal

assessment for allocation of limitMaximum Financing Limit As per PRs and subject to bank's internal

assessment for allocation of limitMinimum Tenors 90 daysMaximum Tenors 1 YearTarget Customers All customers falling under corporate, SME sectorSecurity/Collateral Required Cash, Collateral, Pledge, Mortgage or

hypothecation of asset or as per PRs or bank's requirement.

BANK ISLAMI PAKISTAN LIMITED

MurabahaUnderlying Islamic Mode MurabahaType of Product Corporate, SMEBasis for Pricing KIBORMinimum Financing Limit As approved by bank's credit committedMaximum Financing Limit Rs.900 million (linked with bank's equity)Minimum Tenors 15 daysMaximum Tenors 180 daysTarget Customers Corporate, SME

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Security/Collateral Required Cash margin, Equitable/registered mortgaged pledge of stocks/shares, Hypothecation charge on current assets

EMIRATES GLOBAL ISLAMIC BANK LIMTED

Murabaha Finance LocalUnderlying Islamic Mode MurabahaType of Product Corporate, SME and Investment BankingBasis for Pricing depend on the credit worthiness of the clientMinimum Financing Limit NoMaximum Financing Limit as per PRsMinimum Tenors NoMaximum Tenors 3YearTarget Customers SME, Local Corporate Security/Collateral Required pledge of commodity finance inclusive of margin,

Hypothecation, Mortgage, Personal Guarantee, Cash Margin, Lien,

DUBAI ISLAMIC BANK LIMITED

Murabaha for Purchase Order (local)Underlying Islamic Mode MurabahaType of Product Corporate, Commercial and SMEBasis for Pricing Cost plus mutually agreed profitMinimum Financing Limit As per prudential regulationsMaximum Financing Limit As per prudential regulationsMinimum Tenors NAMaximum Tenors 1 yearTarget Customers Manufacturing industries, Construction Industries,

Traders and IndividualsSecurity/Collateral Required Hypothecation of assets, Charge on current & fixed

assets or any other security deem necessary by the bank

References

Mr. Zulfiqar Ali

(Branch Manager, Meezan Bank Ltd. i 10 Markaz Branch, Islamabad)

Mr. M. Sajid Javed 26

(Assistant Vice President & Manager, Soneri Bank Ltd, I 10 Markaz Islamabad)

Mr. Shoaib Hassan

(Credit Manager, Meezan Bank Ltd, Yarn Market Branch, Faisalabad)

Mr. Ashfaq ur Rehman

(Customer Relationship Manager, Bank Islami, Blue area Branch, Islamabad)

www.sbp.org.pk/ibd/2008/IFAS/Session-2-IFAS-1.ppt

www.alhudacibe.com/.../Bai%20(Murabahah.../Murabaha%20by%20Muftti%20Najeeb

%20Khan.ppt

www.sbp.org.pk/.../Murabaha%20Facility%20Agreement-1.htm

www.sbp.org.pk/ibd/Bulletin/Bulletin.asp

http://www.meezanbank.com/docs

http://www.albaraka.com.pk/downloads-documents/FinancialStatments

http://www.dibpak.com/Upload/142010124820DIBPLAccountsDecember2009FinalCopy.pdf

http://www.egibl.com/egibl/downloads/financail-statement

www.bankalbilad.com

http://www.meezanbank.com/murabaha.aspx

http://www.albaraka.co.za/home.aspx

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