The last point of article 42 narrated that an Islamic financial institution may seek a security margin from the customer for extending the Murabahah financing. Such funds can be placed on a term deposit on a Mudarabah basis if the customer so desires so as to benefit from the distribution of profit carried out by the Islamic bank.
We continue to discuss the parameters related to the Murabahah transactions as follows:
• Shariah principles do not permit the recovery of any amount on account of a commitment fee for providing the revolving Murabahah facility by an Islamic bank to customers. A commitment fee is defined as the amount charged by conventional banks on the unutilized portion of a revolving facility or a term loan and is classified as interest by the Shariah scholars constituting AAOIFI’s Shariah board. However, an Islamic bank may charge a certain administrative fee for their effort in processing a client’s request for a revolving Murabahah facility.
• At times, the amount of a Murabahah transaction is quite large to be financed by a single bank. In such a situation, various banks form a consortium in order to distribute the financed amount. Such a consortium is represented by one of the member banks on behalf of all the participant banks. In such a situation, the Islamic bank acting as the agent is entitled to claim an agency fee which must not be charged to the customer and paid by the participating banks to the agent bank on a pro rata basis.
• If due to any reason, the customer fails to fulfill its promise to enter into a Murabahah transaction for the purchase of certain goods from the bank despite reminders, the bank shall have the right to sell the goods to a third party, which could well be another client of the bank, or to sell in the open market. In case the bank incurs any loss on carrying out such a forced sale, this shortfall shall be paid by the customer who is bound to do so in terms of the ‘promise to purchase’. If the customer had provided any security amount, the bank shall have the right to appropriate such funds to meet the loss and the balance of the security amount, if any, shall be paid by the bank to the customer.
• Continuing with the customer’s default scenario, if the Islamic bank is able to recover any surplus amount by virtue of the sale of goods in the market, it will have the right to retain the entire surplus since the title to the goods had not transferred to the customer when the sale took place, and the bank held the title and possession to the goods and hence as per Shariah principles, the bank deserved the surplus. In this situation, the bank will refund the customer’s security amount if it was obtained.
• The Murabahah transaction shall be entered into between the bank and the customer after netting out the security amount paid by the customer. If the security amount was placed in a term deposit with the bank, it will be broken in order to complete the Murabahah transaction and the customer shall be paid the profit whenever the bank undertakes the distribution of profit to customers.
• A common mistake often repeated is that the Islamic banks’ staff signs the Murabahah agreement with the customer prior to purchasing the goods from the supplier. This is against the Shariah principle that dictates that one cannot sell something which one does not own and possess.
Therefore, the Islamic bank is barred from selling any goods through a Murabahah transaction unless it has purchased the same and holds the title and possession to the goods. Shariah auditors have spotted such transactions in Islamic banks and financial institutions and the matter reported to the respective Shariah boards which acted by discarding the income related to such transactions from the bank’s bottom line and donating it to charity.
• The bank has been permitted by the Shariah scholars to appoint the customer as the bank’s undisclosed agent in cases where, owing to a sole agency agreement between the supplier and the customer, the bank is not able to establish the letter of credit in its own name as the buyer for the import of goods.
As such, when the goods arrive, although these shall be in the name of the customer (who is acting as the agent), the bank shall be holding the title and possession in terms of the agency. However, it is important to note that, in case of imports on a consignment basis, the customer must inform the bank of having received the goods and to make the offer to purchase the same from the bank.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the projects advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next Week: Explanation of the final few parameters of the Murabahah contract to continue.