TUTORIAL 1: MUSHARAKAH AND MURABAHA

Lecturer name : Nurul Syuhada bt Zaidi

Name and matric no:

1) NurulJannah Binti Mohd Saidi (65159)
2) Dafina Khairuniesa Binti Azlam (64688)
3) Chang Li Jia (69314)
4) Lim Zhi Rui (70207)
5) Shaheal Ahmed Bin Tufail Ahmad (67660)
TABLE OF CONTENTS

Introduction to Islamic Banking…………………………………………………………….. 3

Musharakah ………………………………………………………………………………….4
Al-Murabahah ……………………………………………………………………………….8

Conclusion ………………………………………………………………………………….13

References…………………………………………………………………………………..14

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1. INTRODUCTION TO ISLAMIC BANKING.

Islamic financing is the practise of raising funds in accordance with Sharia, or Islamic law. It
also applies to the kinds of investments that are allowed under this legal framework. Islamic
finance should be thought of as a one-of-a-kind approach to socially responsible investing (L.
Ross, 2020). Even though Islamic finance dates to the seventh century, it has only been
formalised since the late 1960s. The enormous oil riches fuelled renewed interest in and
demand for Sharia-compliant goods and practises, which accelerated the process. In modern
times, Islamic principles are followed by more than 300 banks and 250 mutual funds around
the world. Islamic banks' wealth increased from $200 billion in 2000 to close to $3 trillion in
2016. The rising economies of Muslim countries are primarily responsible for this expansion
(especially those that have benefited from the rising price of oil).

To understand Islamic banking, it is essential that we understand what Islamic principle are.
Islamic banking concepts are drawn from the Qur'an, Islam's central religious book. All
transactions in Islamic banking shall adhere to shariah, Islam's legal code (based on the
Qur'an's teachings). Fiqh al-muamalat refers to the laws that regulate commercial transactions
in Islamic banking. At the same time, Islamic finance strictly prohibits the act of riba (usury)
and gharar (ambiguity or deception). Any kind of speculation or gambling, referred to as
maisir in Shariah, is strictly prohibited. Taking interest on loans is also prohibited by Shariah.
Therefore, in order to earn money without the typical practice of charging interest, Islamic
banks use equity participation systems. This equity participation system is quite different
from the interest on loan system as when a bank lends money to a corporation, the company
can repay the loan without interest in exchange for a share of the company's earnings. The
bank would not prosper if the company defaults or does not make a profit.

Islamic Banking In Malaysia started when the Perbadanan Wang Simpanan Bakal-Bakal Haji
(PWSBH) was incorporated in September 1963. PWSBH was established as a way for
Muslims to save money for their Hajj (Mecca pilgrimage). PWSBH and Pejabat Urusan Haji
merged in 1969 to form Lembaga Urusan dan Tabung Haji (now known as Lembaga Tabung
Haji (Wikipedia contributors, 2020). In 1983, Malaysia's first Islamic bank was launched.
The Islamic Banking Scheme, which was established in 1993, permitted commercial banks,
merchant banks, and finance firms to provide Islamic banking products and services (IBS).

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2. MUSHARAKAH

Introduction of Musharakah

Musharakah is a financing technique adopted by the Islamic banks. Musharakah is a

partnership structure in Islamic finance. The partners share the profit and losses of the
enterprise. As Islamic law does not allow profit from borrowing interest, musharakah allow
project or company financiers to receive a portion of the actual profit in return at a
predetermined ratio. However, unlike the traditional creditors, if there is any losses occur,
financiers will also share the losses on a pro-rata basis. Musharakah is a type of shirkah al-
amwal or partnership which means “sharing” in Arabic.

Type of Musharakah

1. Shirkat-ul-milk (Partnership by joint ownership)

Shirkat-ul-milk means having two or more people in joint ownership of a particular
property. This “Shirkah” may exist in two different ways:
i) Optional (Ikhtiari)
At the option of the parties, for example, if two or more people purchase
equipment, the equipment will jointly owned by both parties and the relationship
between them regarding the property is called “Shirkat-ul-Milk Ikhtiari”. They
elected to buy the equipment together, so this relationship exists according to their
option.
ii) Compulsory (Ghair Ikhtiari)
It will operate automatically without any effort or action from all parties. For
example, after a person dies, all his or her heirs inherit his or her property, which
will comes into their joint ownership as the natural consequence of that person’s
death.

There are 2 more types of Shirkat-ul-milk which are Shirkat-ul-Ain and Shirkat-ul-
Dain.

2. Shirkat-ul-Aqd (Partnership by contract)

Shirkat-ul-Aqd means a partnership effected by a mutual contract. It can also be
translated as joint commercial enterprise. Shirkat-ul-Aqd is divided into three types:
i. Shirkat-ul-Amwal (Partnership in capital)

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 Shirkat-ul-Amwal means all the partners will invest some of the capital into a
commercial enterprise.
ii. Shirkat-ul-Aamal (Partnership in services)
This partnership can also be called Shirkat-ut-taqabbul, Shirkat-us-sanai or
Shirkat-ul-abdan. All the partners will jointly undertake to provide some services
to their customers and the fees collected from them are allocated to them
according to agreed ratio.
iii. Shirkat-ul-wujooh (Partnership in goodwill)
The partners have no investment at all in this type of partnership. They borrowed
the capital with goodwill to buy goods at a deferred price and sell them on the
spot. The profit that earned will distributed between the partners at an agreed
ratio.

The three type of Shirkat-ul-Amwal can be further divided into two types, which are
Shirkat-Al-Mufawada (Capital & labour at par) and Shirkat-ul-Ainan (Muhammad,
2002).

Management Musharakah

The principle of musharakah is that every partner has the right to participate in its
management as well as work towards it. However, the partners can agree to the conditions of
management by one of them and the other partners are not allowed to work for musharakah.
The sleeping partner only be entitled to the profit within the scope of his investment and the
ratio of the profit allocated to him should not exceed the ratio of his investment. However, if
all of the partners agree to work for the joint venture, each partner should be regarded as
another person’s agent in all business matter and any work done by any one of them in the
normal business process shall be deemed to be authorized by all partners (Muhammad, 2002).

Diminishing Musharakah

Diminishing Musharakah is a partnership with the complete ownership of the purchase of

another partner’s shares in the project through a mutually agreed redemption mechanism
between both of them. Diminishing Musharakah is usually used when one party wants to own
an asset or a commercial business but do not have enough funds to pay the full price and

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accept the assistance of funding from other party. The financier’s share is divided into
multiple units and the customers will usually purchase the units of financier’s shares
periodically, therefore, increases his share until the customers has purchased all the units of
the financier to make him the sole owner of the asset. In this form of partnership, all of the
partners are co-owners of each part of joint property or asset on a pro-rata basis and a partner
cannot claim a specific part of the property or asset or leave the other parts to other partners
(Weebly, 2021).

Termination of Musharakah

Musharakah can been terminated in any one of the following events:

1. Each of the partner has the rights to terminate the musharakah at any time after
sending the notice of this effect to his partner, thereby bringing musharakah to an end.
In this case, if the musharakah asset is in the form of cash, all assets will be
distributed pro-rata between the partners. However, if the assets have not been
liquidated, the partners can reach an agreement on the liquidation of the assets or their
distribution or division among partners.
2. If either party dies during musharakah’s currency, the musharakah’s contract with him
will be terminated. In this case, his heirs can choose to draw the decreased share from
the business or continue with the musharakah contract.
3. If either partner becomes insane or otherwise becomes incapable to conduct
commercial transactions, the musharakah will be terminated.

Termination of Musharakah without Closing the Business

If either one partner wishes to terminate the musharakah but other partner or partners
wishes to continue the business, this can be achieved by mutual agreement. The partner
who want to operate the business can purchase the shares of partners who want to
terminate their partnership, because the termination of musharakah with one partner does
not mean that musharakah can be terminated between other partners. However, the share
price of the leaving partner must be determined by mutual agreement. If there is a dispute
on the share valuation and the partners have not reached the agreed price, the leaving
partner can compel other partner to liquidate or on the distribution of the assets
themselves (Termination of Musharakah, 2021).

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Difference between Interest Based Financing and Musharakah

Interest based financing Musharakah

Regardless of the debtor’s gain or loss, the The return is based on the actual gain
lender’s fixed rate of return of a loan obtained by the joint venture, Musharakah
advanced is predetermined by the did not envisage a fixed rate of return.
financier.
Financier cannot suffer the losses. If the joint venture fails to achieve results,
the financier will suffer losses.
Causing the injustice either to creditors or The creditor’s return is linked with the
debtors. If the debtor suffers a loss, it is actual profit generated by the enterprise,
unjust on the creditor part to claim the the larger the profit obtained, the higher
fixed rate of profit. And if the debtor earns the rate of return to the creditor. If the
a very high profit rate, it is injustice to the company makes huge profit, all of it
creditor to give him small sum of profit cannot secured by the debtor exclusively,
and distribute the proportion of the profit but it will be shared by the common
for the debtor (Muhammad, 2002). people (Muhammad, 2002).

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 3. AL-MURABAHAH

Murabaha, also known as cost-plus financing, is an Islamic financing arrangement in which

the buyers and sellers negotiate on the asset's cost and markup. The markup takes the position
of importance, which is prohibited under Islamic law. Murabaha is not an interest-bearing
loan (qardh ribawi), but it is a permissible mode of credit selling under Islamic law.

Murabaha is a type of contract, specifically a sales contract between a bank and a customer
for the selling of merchandise at a price plus an agreed-upon profit margin for the bank. The
deal calls for the bank to buy goods and then resell them to the customer at an agreed-upon
markup. In most cases, repayment is done in instalments.

PILLARS OF AL-MURABAHAH

 Seller
 Buyer
 Merchandise or goods
 Price
 Sighah: Offer(Ijab) and Acceptance (Qabul)

FLOWS OF AL-MURABAHAH

Payment of purchase price Payment of purchase price + Premium

Suppliers of Goods
Customer
Islamic Bank

Sale of asset Sale of asset

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CONDITIONS OF AL-MURABAHAH

1. Product and selling price

The commodity, including its form, quantity, and other descriptions, must be clearly
described and the sale rates, especially its cost and benefit, must also be distinctly and
truthfully disclosed.

2. Contracting parties
The seller is responsible for delivering the goods requested by the customer, and the
buyer is required to pay for the product bought in accordance with the terms of the
arrangement. In this case, all parties must be mature, fair, and capable of being kept
accountable.

3. Offer and acceptance

It must include the two essential elements, the cost price and the profit rate. The initial
price must be fungible, which means that the price at which the purchaser acquired
the products must be determined by weight, length, or number of homogeneous
goods.

4. No riba trading shall be involved.

The goods traded cannot be paid for using the barter method of ribawi things that the
Prophet Muhammad S.A.W. prohibits. Unless weight, measurement, and calculations
are identical, for example, gold for gold, silver for silver, wheat for wheat, and dates
for dates.

5. The initial contracts must be valid.

According to Shariah requirements, the exchanged good or property must be legally
possessed by the seller.

STAGES OF MURABAHA CONTRACT

1. Promise Stage
Client and bank sign an agreement to enter into Murabahah.

Bank Client

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 Master Financing Agreement

2. Agency Stage
Client appointed as agent to purchase goods on bank’s behalf. Bank gives money to
client for purchase of goods.

Master Financing Agreement

Bank Client

Agency Agreement

3. Acquiring Possession
Client purchases goods on bank’s behalf and takes their possession.
Transfer of the Risk

Client Vendor Bank

Client purchase and takes as possession

4. Execution
Client makes an offer to purchase the goods from bank. Client pays agreed price to
bank according to an agreed schedule. usually on a deferred payment basis (Bai
Muajjal)

Bank Client

Client offer the price and make the payment

Different Relationship at Different Steps

 Master Murabaha Financing Agreement

o Bank (Promise to Sell) and Client (Promise to Buy)
• Agency Agreement
o Bank (Principal) and Client (Agent)
• Purchase and Payment of Purchase Price
o Bank (Buyer) and Vendor (Seller)
• Offer & Acceptance
o Bank (Seller) and Client (Buyer)

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 • Payment of Murabahah Price
o Bank (Creditor) and Client (Debtor)

ISSUES IN MURABAHAH

1. Timing of ‘Offer & Acceptance’

This is to be signed by the customer when it has purchased and taken possession of
the goods as the Bank’s agent. Offer & Acceptance must be signed while the goods
are still in existence and have not been used in the production process or sold to some
other entity. The timing and sequence are very important when using Murabahah
financing agreement.

2. Rollover in Murabahah
Rollover in Murabahah is not allowed since each Murabahah transaction is for the
purchase of a particular asset. A new Murabahah can only be executed for the
purchase of new assets.

3. Rebate on Early payment

Customer that makes early payment and there is no commitment from the institution
in respect of any discount in the price of Murabahah, then the institution has the sole
discretion in allowing them the rebate. If this issue arises, it should be brought up to
the Shariah advisor.

4. Penalty in Late payment

As soon as the Murabahah is executed, the Murabahah price becomes a receivable
(Dayn) for the Bank. Hence, any amount charged over and above the “dayn” amount
will be Riba. However, it is permissible to have an undertaking from the customer to
pay an amount of money or a percentage of the debt to be donated to charitable causes
in the event of delay in payment.

5. Subject matter of Murabahah

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 Goods must exist at the time of execution of Murabaha. Murabaha cannot be done in
all commodities, paying utility bills, wages, overhead expenses, etc.

6. Purchase Evidence
The customer required submit asset purchase evidence along with Offer &
Acceptance. The purchase evidence must confirm that the asset purchase took place
after the agency agreement.

7. Direct Payment in Murabahah

The disbursement is made to the customer as an agent of the bank. In order to ensure
transparency of the Murabaha, it is preferable that disbursement or payment be made
directly to the supplier.

8. Profit Recognition in Murabahah

There are two stages of transaction in Murabahah which the first one is the Investment
Stage (Agency to Purchase) and the Financing Stage (Declaration to payment). The
profit for the Murabaha transaction can be recognized after the goods are sold by the
bank to the customer.

9. Training of Customers & Bank staff

The staff should be properly train and have very deep understanding in Murabahah as
the staff will be dealing with the Murabahah and the customers.

10. Process of Murabaha differ from product to product

The application of Murabahah may be differ for all the products like sugar cane,
shares, leather, cotton, gas, and petrol

APPLICATION OF MURABAHAH

Murabahah can be used to finance asset that is valuable according to the Shariah. It mainly
uses for the import finance, export finance, house finance, car finance, and working capital
finance.

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4. CONCLUSION

In conclusion, Islamic banking is quite distinct from the regular banking system but also has
its benefits. First and foremost, Islamic banking is much safer as any purchases that help
illegal businesses practices that are banned in Islam are prohibited by Shariah principles.
Secondly, there is a misconception that Islamic banking is only for Muslims and this is not
the case. Islamic Banking, while based on Shari'a values, is not limited to Muslims and is
open to non-Muslims as well (Advantages Of Islamic Banking, n.d.). Other than that, Islamic
banking is also fairer as the foundation of the Islamic Banking model is based on a profit-
sharing principle, whereby the risk is shared by the bank and the customer. The traditional
banking system is dependent on interest rates on money deposits at a predetermined rate.
Since the payment and collection of interest is forbidden under Shariah Law, Muslims avoid
banking. Financial inclusion, on the other hand, may be encouraged by Islamic banking,
resulting in a greater pool of savings in the local and global economy. And finally, Islamic
promotes and accelerates overall economic development. In order to draw more funds from
its depositors, each bank in the Islamic banking industry will invest in promising business
projects and attempt to outperform its competitors. This will result in a strong return on
investment for both the bank and the depositors in the long run. This is unlikely in a
commercial bank, where depositors receive pre-determined interest rates on their deposits.

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