- Murabaha is a fixed – price contract and popular mode of trade.
- As per Murabaha’s modus-operandi, client approaches the Islamic bank with a request to purchase certain goods from an independent supplier.
- Client promises to purchase the same goods upon the Islamic bank getting title and possession.
- The sale price to the client will comprise of the Islamic bank’s cost plus its profit ascertained as per agreement with client, to be paid on agreed.
- An Islamic bank establishes letters of credit as purchaser in favor of the supplier and sells the goods to the client upon receipt on murabaha basis.
- For locally available goods, Islamic bank staff acquires physical possession to the goods and then delivers them to the client after the client signs the murabaha contract.
- This way, sharia requirement of owing goods and having possession (physical or constructive) prior to sale on murabaha is fulfilled. Constructive title or possession is through a nominated agent.
- Islamic bank may ask the client to provide certain amount as security deposit or to furnish any acceptable guarantee / security.
- Documents are received in Islamic bank’s name as purchaser, thereby establishing its ownership and possession to the goods.
- Supplier’s commercial invoice in Islamic bank’s name establishes its title whereby bill of lading made out to Islamic bank’s order provides possession to it before it sells the goods to the client.
- Title and possession to the goods get passed to client upon signing the murabaha contract and endorsement of documents by Islamic bank to it .
- Client pays the murabaha amount to Islamic bank on agreed deferred basis, which could be in lump-sum or in installments.
- In case of client’s failure to purchase goods, Islamic bank can sell them to a third party and recover shortfall (if any) from client, including to forfeit security deposit or claim against any guarantee / security.