Additional rules of Murabahah transaction

In-Depth Analysis

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. We continue to discuss the parameters related to the Murabahah transactions. 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. 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.' Continuing 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. The Murabahah transaction shall be entered into between the Islamic bank and the customer after netting out the security amount paid by the customer.