prof khaliq- murabaha n salam

7/31/2019 Prof Khaliq- Murabaha n Salam

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Islamic Modes for Agricultural

Financing PRODUCTS – Murabahah and

Salam Margalla Hotel, November 28, 2011

Al – Huda Training Programme

Muhammad KhaleequzzamanHead Islamic banking DepartmentInt’l Islamic University Islamabad



Islamic Modes – Agricultural Financing

Agricultural production Cycle - Crops

Acquisition of land/Choice of crop

Preparation of land

Crop productionoperations

Harvesting

Post harvest &Marketing

Entering Contract of cultivation incase of rented land, decision about crop

in view of market demand

STAGE ACTIVITY

Sowing/transplantation, Irrigation, Fertilization,Weeding, Pesticide application

Clearing, Leveling, Plowing, Seed bed preparation,Installation of Irrigation/drainage system

Cutting/ picking,threshing

Cleaning, Grading, Processing, Packing,Storage, Transportation, Sale of produce




Areas of Financing (including crop production)

– Working Capital (Short term): • Crop production [Purchase of inputs i.e. seeds, fertilizers,

pesticides, etc.] {Murabahah}

• Poultry Farming [purchase of feed/raw material,birds/chicks, vaccination/medication, utensils, etc.]

{Murabahah}

• Dairy Farming [purchase and production of feed/fodder,milk container, vaccination/medication, utensils, etc.]

{Murabahah}

•Fish Farming [purchase of fuel, ration, processing{Murabahah} equipment, purchase of handling and

storage boxes, etc.]

• Liquidity Requirement [repair & maintenance of machinery

& equipment, labor/water/utility charges, etc.) {Salam}





–

Term Financing (medium and long term: • Farm Mechanization [Purchase of tractor and farm

machinery for tillage, sowing/planting, pesticideapplication, harvesting/threshing, etc.] {Murabahah/ Ijarah}

• Transport [purchase of trailers, reefer vans, milk cooling/

chiller tanks/carriers, motorcycles/pickups, of feed/rawmaterial, birds/chicks, vaccination/medication, utensils,etc.] {Ijarah/Diminishing Musharakah}

• Live stock [purchase/replacement of animals for milk &meet production, refrigerated storage, animal sheds, water

supply system, generator, fencing slaughter house etc.]{Murabahah/DM/Istisna}

• Irrigation System [t/wells, sprinkler/drip/solar pumps,water course lining, etc.] {Ijarah/Murabahah/DM/ salam}

• Forest development and enhancement [nursery raising,

tree plantation, etc.] {DM}





– Term Financing (medium and long term: • Poultry Farming [construction of breeding & hatchery

farms, utensils, feed mills, transport & distributionvehicles, slaughtering & processing, etc.] {Murabahah/DM}

• Fish Farming/catching [construction of fish ponds &hatcheries, purchase/replacement of fishing boats,engines, and related facilities & equipments, constructionof cold storage, etc.] {Murabahah/DM}

• Dairy Farming [milk processing, plants, etc.]

{Murabahah/DM/Ijarah} • Miscellaneous [green houses, godowns, dairy/livestock

farms, seed/milk/fruits/vegetables processing equipment]



BLANK SLIDE




Training Workshop – Islamic Microfinance

ISLAMIC MODES/INSTRUMENTS: – Sale Contracts:

• Murabaha/Murabahah to the Purchase Orderer

• Salam/Parallel Salam

•

Istisna’/Parallel istisna – Participatory Modes:

• Mudarabah/Resource Mobilization

• Musharakah/Diminishing Musharakah

–

Rent based Modes:• Operating ijarah

• Ijarah wa iqtina’



Theory & Practice of Murabahah

Preliminary: Rules applicable for Islamic Sale

1. Subject (good to be sold) must exist at the time of sale2. Subject must be in ownership of seller – Physical or constructive

possession [exception in Salam and Istisna’ ]

3. Subject must be property of value

4. Subject should be halal

5. Subject must be known and identified

6. Sale must be instant and absolute

7. Sale must be unconditional

8. Delivery of sold item must be certain

9. Price of subject must be certainRisks and responsibilities attached with the subjectmust transfer from seller to the purchaser as a resultof sale



Training Workshop – Islamic Microfinance

Preliminary:

• Murabahah ; historical perspective

• Murabahah and Musawamah

• Spot and Deferred Murabahah

• Deferred Murabahah and Bai Muajjal

• Banking Murabahah




Murabahah – Concept and Historical perspective

Murabahah defined:• Selling a commodity as per the purchasing price with a defined

and agreed profit (Ribh means profit).

• Profit may be a percentage of the selling price or a lump sum.

• The transaction may be concluded with or without any promise inwhich case it shall be called as ordinary Murabahah or bankingMurabahah or Murabahah to the purchase orderer.

Shariah Legitimacy of Murabahah:

• Qura’an: Surah Ale Imran – “It is no crime for you to seek the

bounty of your Lord” [verse 198] Surah Al-Baqarah – “Allah has permitted trade”

[Verse 275]

• Sunnah: The Prophet (PBUH) purchased a she camel from AbuBakr (RAA) for use as transportation from Medinah...



Process Flow:

Promise Stage – Negotiation/Approval of overall limit

– MOU/Master Murabahah Facility Agreement

– Requisition + Undertaking + Security Deposit (Hamishjiddiyah)

Bank Client MOU/Master MFA

Approval of Limit

2

1

Requisition, Undertaking, Sec. Dep. 3




Agency Stage

– Third party appointed as agent [Optional] –

– Clint can be appointed agent [case of dire need]

– Payment to the Supplier – Direct


ClientBank

Supplier

3

2 Agency Agreement

PaymentSupplier

Agent(3rd Party)

Bank

Supplier

2

1 Agency Agreement

Payment

Agent(Client)

Receipt of Payment

3

Draft of Payment2 A

Receipt of

Payment



Acquisition/Possession Stage

– Constructive Possession• Payment to supplier

• Discount of supplier/benefit to client

• Title of goods

•

Transfer of risk and responsibilites


BankAgent

(3rd party)Supplier

Title Goods

Agent(Client)

Risks and Responsibilities



Execution of Murabahah / second Sale –

Receipt / Possession report – Offer of client to purchase

– Acceptance of offer by the bank

– Return of security deposit

–Collateral obtained

– Delivery of goods / Transfer of Risk & responsibility

– Ownership changes

– Payment of earnest money (Urboun) [Optional]

Payment of Murabahah Price – Client pays Murabaha price as per agreed schedule

– Collateral released

– Murabahah terminates




Execution of Murabahah

ClientAcceptance of Offer

1

2

3

Offer to Purchase

Receipt , Possession Report

Payment of Murabahah Price

Murabahah Terminates

1

Bank ClientMurabahah Price

2

Bank

Sec. Deposit/Hamish jiddiyah

Urboun /Securities 4

3


DP Note



Purchase of poultry feed stock

• Murabahah transaction: Rs. 100,000

• Murabahah Facility: 90 Days

• Payment: Lump sum

• Rate of Profit: Six monthsKIBOR+2%

• Freight: 5% of cost of goods

•Securities: Pledge of feed stock,

post dated cheques




Particulars Amount (Rs.)

Cost of goods Rs. 100,000

Rate of Profit Kibor + 2%

Six monthly KIBOR 10% p.a.

Freight/Insurance 5% of cost

Total cost 100000 x 5% 100000 + 5000

=105000

Profit 10%+2% = 12% p.a. 105000 x 12% x

90/365 = 3107

Murabahah Price 105000+3107= 108107

Pricing of Murabahah [Example]:





Issues in Murabahah:

•Oral promise/unilateral – bilateral promise with option

• Supplier’s price in the name of customer/without any

name/bank’s discretion (offer to negotiate)

• Prior contractual relationship (customer and supplier)

• Vendor being third party [buy back (inah)] • Commitment or credit facility fee

• Documentation charges

• Syndication charges

• Feasibility study fee

• Performance guarantee from customer in case thevendor is of its choice




Issues in Murabahah:

•Hamish Jiddiyah/ trust/return/investment

• Arboun/ treatment/timing

• Sequence of transactions

• Timing of promissory note

• Rollover in murabahah

• Timing of executing murabahah

• Default by the client

• LIBOR/KIBOR being reference price

• Rebate on early payment



BLANK SLIDE




Islamic Modes/Instruments - Sale Contracts:

Salam: Defined A salam transaction is the purchase of acommodity for deferred delivery inexchange for immediate payment. It is a

type of sale in which the price, known asthe salam capital, is paid at the time ofcontracting while the delivery of the item

to be sold known as subject matter ofsalam (al Muslam fihi) is deferred. Salam isalso known as Salaf (lit: borrowing)




Salam: Shariah Legitimacy Allh says “O ye who believe when you deal with

each other, in transactions involving futureobligations in a fixed period time, reduce them towriting” [Al Baqara Verse 282]

Ibn Abbas reported, the Prophet (PBUH) came toMedina on Hijrat and found that people wereselling dates for deferred delivery (salam) over aperiod of one or two years. The Prophet (PBUH)

said: “whoever pays for dates on a deferreddelivery basis (salam) should do so on the basisof specified scale and weight” [Bukhari and

Muslim]




Wisdom of allowing Salam Farmers, orchard owners, merchants can

fulfill their working capital andconsumption needs before the commodity

is ready to be sold




Salam: It is an exception to the possession (a rule

of sale)

A purchase contract with deferred delivery

of goods in exchange of advance pricefully paid on spot (opposite to Murabahah financing)

Benefits both the seller and purchaser –

Seller (client) receives the price in advance

Purchaser (Bank) contracts the price whichis lower than the market price at the time ofdelivery




Conditions of Salam : •

Salam is a binding contract• Full price at spot, otherwise selling debt for debt

(exception – upto 3 days)• Salam capital (price) in principle be in cash,

however, it can also be fungible commodities

(wheat etc.), or usufruct [Imam Malik]• Debt not recognized as salam capital• Sale in case of commodities satisfying condition

of fungibility (Dhawatul Amthal) , quantity bespecified exactly

•

Standardized production of companies can also betreated as salam commodity• Product of a particular field or farm cannot be sold

under Salam




Conditions of Salam :

• Certain date and place of delivery• The commodity should remain in the market

throughout the period of contract [Differentopinions]

•

Time period for delivery should be sufficient toallow use of salam capital conveniently and effectprices, preferably be at least 15-30 days [Differentopinions]

• Subject matter of salam can be exchanged with

other goods only after the date of delivery as longas this replacement is not the part of contract. Butmarket value of exchanged goods should not bemore than the market value of salam goods




Conditions of Salam :

• If the buyer refuses to take delivery of goods(when these meet the specification criteria) heshould be compelled to take delivery

• If seller fails to deliver due to insolvency he should

be granted an extension in time of delivery

• Salam contract can be cancelled with the consentof both parties, and only the original price paid isreturned

• A security/guarantee or personal surety can beobtained as safeguard against risk of default



Bank Client

Payment of Salam Price 1-1-2007

Delivery of Goods 30-6-2007

Salam

Transaction Agent

Third Party




Salam: Procedural Alternatives:

• The banks face limitations in receivingcommodities and selling them in the market

• Banks can overcome the limitation by establishinga subsidiary to undertake this task

• Banks can adopt Parallel Salam or Third partysales to avoid this situation

• Banks can appoint the client its agent to sell thecommodity. The agency agreement should be

separate from the salam agreement• If agent has been able to sell the commodity at a

price more than the one stipulated in agencyagreement, he is entitled to get the difference



Client Delivery ofCommodity20 Dec 06

PurchaserMFI

Third Party2nd Salam15 June 06

Delivery ofCommodity20 Dec 2006

ParallelSalam

Salam Sale Contract 1 June 061

2

5

Salam Price Payment 1 June 06

2 n d S

a l a m C o

n t r a c t

P a y m e n t o f

P r i c e

Client Delivery ofCommodity20 Dec 06

PurchaserBank

Third Party2nd Salam15 June 06



2

5

3 4


2 n d S

a l a m C o

n t r a c t

P a y m e n t o f

P r i c e

6

1 5 J u n e 0 6



ClientDelivery ofCommodity20 Dec 06

PurchaserBank

Third PartyPromise and

Payment


Third PartyPromise


2

5

3

4

6


P a y s 2 0 D e c

0 6

P r o m i s e t o P u r c h a s e

1 5 J u n e 0 6




Rules of Parallel Salam and Third party promise

•

Both the contracts viz. salam and parallel salammust be independent of each other, otherwise itbecomes two sales in one contract

• Parallel salam is allowed only with third parties.

Therefore the original seller cannot be entered intothe parallel salam

• If one party breaches its obligation, the bank hasno right to refuse delivery of goods in parallel

contract

• The third party giving unilateral promise shouldnot pay the price as this is not allowed in Shariah




Difference Between Salam and Murabaha

Salam Murabahah

Delivery of good is deferred,price is paid at spot

Good is delivered at spot,payment of price is deferred

Price has to be paid in full Price can be paid on spot ordiffered, lump sum or ininstallments

Salam is not executed in thecommodity of particularspecifications or thecommodity from particular

origin

Murabaha can be executed inparticular commodity.



THANKS


prof khaliq- murabaha n salam

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