30 June, 2012

 

Legal News & Analysis – Asia Pacific – Singapore – Islamic Finance

 

What is Murabahah?
 
Murabahah or murabaha is a term which refers to a kind of sale which is Shariah-compliant. In a murabahah transaction, a seller will agree with a buyer to provide specific commodities at a pre-determined price. The basis of a murabahah transaction is that the seller will disclose to the buyer the actual cost he has incurred in acquiring the commodities and the profit which he will make following the sale. Applying a commodity murabahah structure in a financing transaction The concept of murabahah is commonly used by banks and financial institutions as a mode of financing. Under this structure, a bank will purchase and take title to certain commodities from a third party broker (1). The bank will then sell the commodities to the customer at cost plus a pre-determined profit margin (2). The payment of the sale price will usually be on a deferred basis. The customer will then sell the commodities to a different third party broker at the cost price (3). As a result, the customer will have a deferred payment obligation to the bank. This is akin to the payment obligation of a borrower under a conventional loan and can be structured either on an instalment or lump sum basis. (see page 3 of the pdf here for a diagram)
 
It is important for the assets to exist and for the bank to take possession of the same because the bank must own the assets at the time of the sale. This will go to show that the transaction is a real trade transaction, and not merely a financing. Further, the underlying commodities under a murabahah transaction must be Shariah compliant. 
 
Bursa Suq Al-Sila 
 
The Bursa Suq Al-Sila is a collaboration between the Central Bank of Malaysia, the Securities Commission and Bursa Malaysia Berhad (the Malaysian stock exchange) together with key industry players in support of the Malaysia International Islamic Finance Centre initiative. It is a fully electronic international commodity trading platform and is specifically dedicated to facilitate commodity based Islamic financing and transactions under the principle of murabahah (amongst others).
 
This platform is the first of its kind in the world. It is an end-to-end system and does away with the need for participants to appoint separate commodity brokers to carry out a murabahah transaction. Crude palm oil was used as the first underlying asset and the understanding is that this will expand to other Shariah approved commodities in the near future.
 
Issues with the commodity murabahah
 
The commodity murabahah has been widely criticised as a synthetic and fictitious transaction and many scholars argue that it should not be permissible under Shariah. In many commodity murabahah transactions, the commodities do not change hands and are often irrelevant to the borrower’s business. The transactions are often just recorded as cashflows between the participants. 
 
Notwithstanding its criticism, the demand for the use of the commodity murabahah structure is still strong as it provides borrowers who want to undertake Shariah compliant fund raising with a simple method of doing so.

 

 

For further information, please contact:

 

Yip Jia Hui, ATMD Bird & Bird

jiahui.yip@twobirds.com

 

 

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