What is Murabaha?

SHARIAH AUDIT PROGRAMME FOR MURABAHA

Murabaha – Summarized Flow

n Murabaha is a cost plus profit sale, i.e. a sale in which the seller informs the customer about his cost and the amount of profit. n Contemporary Murabaha transaction (referred to as Murabaha to the Purchase Orderer by AAOIFI Standard) is normally a deferred payment sale. In this transaction, the Bank, on request of a customer, purchases an asset / commodity from market on cash and then sells it to the customer on credit. n Ba’y Murabaha, by its very nature, is a purchase-sale / trading transaction. In other words it is not a “financing” transaction and instead, it is a substitute to financing transactions.

Sample Shariah Audit Programme for Murabaha S. No. 1.

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Audit Procedures n Obtain list of transactions during the period, account details and list of parties, alongwith summarized schedules from the respective department. n Perform basic analysis of balances and transactions and identify and investigate any significant differences / events during the period. Significant transactions and events should judgmentally be included in the audit sample. n Select ________Murabaha transactions on a random basis, ensuring that the selection covers the whole period of the audit and the locations / branches, as well as, a number of customers.

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Sample Shariah Audit Programme for Murabaha S. No. 4.

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Audit Procedures

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n Check the Murabaha contracts for the transactions selected and verify that the standard version of the contracts approved by the Shariah Advisor has been used without any change. If there are any changes, verify that these have been approved by the Shariah Advisor. n Verify that a request of Murabaha has been received customer and bank to enter into a Murabaha transaction. n Verify the nature of goods and check that the same do not fall in the category of the goods declared unlawful (Haram) by Shariah.

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Sample Shariah Audit Programme for Murabaha S. No.

Sample Shariah Audit Programme for Murabaha

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n Verify that the goods are not used for Haram activities. Check the objective of financing and analyze the customer’s needs and the customer’s nature of business activities. n Verify that the bank has the title and bears risks and rewards of the goods before the sale takes place. Particularly, check whether the bank has obtained physical or constructive possession of goods. n Verify that the buyer acquires the title to the goods and bears risks and reward thereon when the sale takes place.

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Audit Procedures

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n Verify that the subject of sale is a tangible asset. n Verify that the bank has borne the freight cost, Takaful / insurance premium of the goods and other relevant expenses before execution of sale which may be covered in the Murabaha Price. n In case of loss of goods during such period, the same shall be borne by the bank

Sample Shariah Audit Programme for Murabaha S. No. 13.

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Audit Procedures n Verify that there is no any buy back option in the contract or in execution of the same (including buy-back through related party / buy back of already purchased goods). n Check that the price of the goods are not changed subsequent to the consummation of the sale transaction. n Check that the cost of the goods sold and the profit is mentioned in Murabaha offer and acceptance.

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Sample Shariah Audit Programme for Murabaha S. No. 16.

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n Verify that the bank has appointed the client as an agent to buy the (same) goods on its behalf through an Agency Agreement before the purchase of goods. n If any remuneration (for agent) is payable to the agent, then verify that it is fixed and paid accordingly. n Check that the goods allowed under Agency Agreement have been specifically mentioned and are permissible under Shariah.

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Sample Shariah Audit Programme for Murabaha S. No.

Sample Shariah Audit Programme for Murabaha

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n Check that the total amount of financing does not exceed the limit approved in Master Murabaha Agreement / facility letter. n Verify that Murabaha is executed before consumption of commodity by the customer. n Verify that the subject matter of the sale is specifically known and identified (in reasonable details) to the seller and the buyer.

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Audit Procedures

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n Verify that at the time of signing of the Agency Agreement the agent do not have possession of the goods (or have not committed to purchase the goods under an agreement or irrevocable promise including LC). n Verify that bank makes payment directly to the supplier.

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n Check that the offer to sale by the bank has been duly approved by the customer and signed and dated.

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n Verify that the Murabaha Sale is executed after the customer’s intimation of receiving the goods.

Sample Shariah Audit Programme for Murabaha S. No. 26.

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Audit Procedures n Check that any discount offered by the supplier to the bank is transferred to the customer (through reduction in cost). n Verify that the price and other conditions must not change once agreed between bank and the customer. n Check that rollover in Murabaha or to change in profit after due date has not been done. However, the bank may reschedule the remaining actual amount in installments without additional profit or marker.

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Sample Shariah Audit Programme for Murabaha S. No. 29.

Audit Procedures

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n Verify that in case of joint purchase the customer has notified his share in the consignment prior to request for disbursement of Murabaha. The sharing must be based on Physical Units of commodity covered or an agreement for Musha should be made.

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Sample Shariah Audit Programme for Murabaha S. No. 30.

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Audit Procedures n Check that in case of late payment the charity fund received has been credited to charity account directly and is in accordance with the rates specified in the agreement. n Verify that all statutory and banking regulations applicable to Murabaha transactions and the requirements of IFAS-1 are compiled with.

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