COMMODITY MURĀBAHAH And TAWARRUQ ASSOC. PROF. DR. AZMAN MOHD NOOR (azzmannor@gmail.com)
Intro Commodity Murabahah is an example of product innovation in Islamic banking and finance, which is based on Murabahah and Tawarruq transactions. This presentation will shed light on the structure of Commodities Murabaha Transaction offered by Bursa Malaysia
Definitions Murabahah: A sale with a mark up price Tawarruq: (Monetization) refers to the process of purchasing a commodity for a deferred price determind through Musawamah (bargaining) or Murabahah (mark-up sale), and selling it to a third party for a spot price so as to obtain cash. Inah: refers to the process of purchasing the commodity for a deferred price, and selling it back for a lower price to the same party. (See AAOIFI standard no 30, pg.525)
Operation Flow of BURSA SUQ AL-SILA Bank A 1 Supplier 1 2 Supplier 2 Bank B Commodity Cash Payment Differed Payment 3 4 Supplier 3 Supplier 4 4
SUPPLIERS COMMODITY SELLERS (1)Sells RM10 million worth of Crude Palm Oil (CPO) warrants commodity to the Islamic Bank A on spot basis. (3)Delivers the commodity on the same day and the ownership is transferred to the Islamic Bank A. ISLAMIC BANK A (2) Buys/Pays RM10 million worth of Crude Palm Oil (CPO) warrants commodity from supplier, on a spot basis. (4)Sells the commodity to the Client/Islamic Bank B at Rm10 million plus a profit margin (MurābaÍah) on deferred payment. BURSA SUQ AL-SILA' (7) Purchases the commodity from the Islamic Bank B at RM10 million (purchase price) on a spot basis. (8) BSAS is a trading and Clearing Engine. ISLAMIC BANK B (5) Purchases the commodity from the Islamic Bank A at RM10 million plus a profit margin (MurābaÍah) on deferred payment. (6) Sells the commodity to Bursa Suq Al-Sila' for RM10 million on a spot basis, on the same day. (9) Sells the commodity to the Suppliers back randomly for RM10 million on a spot basis.
How the proceed of the sale is paid to the financing customer? Normally the suppliers and BSAS already have supplier s, customer s and BSAS s account (or will make sure that those accounts are active prior to the execution of the transaction). The proceed of the sale will be transferred from the BSAS/end buyer to the customer s account after the instruction from BSAS is received by the bank. Bearing in mind, it should not be from the bank s own account.
Reverse Tawarruq for Deposit Taking 5 a ABC sells commodity to BSAS on spot for cash 6 ABC settles amount due to Customer on deferred payment basis based on terms 5 b Proceeds delivery 4 b Customers sells commodities to ABC at profit on deferred payment basis Commodity Murabahah House (BSAS) ABC Islamic Bank 4 a Onward delivery of commodity ownership Customer/ Counter Bank 3 b Ownership delivery on behalf of Customer 2 Customer requests ABC to act as agent (wakalah) to buy the commodity from the market 3 a As an Agent, ABC buys commodity from Broker 1 1 Customer wants to make fixed deposit with ABC, with a fixed return
DEBT FACTORING MODEL 1 1. Customer has RM100K Immature receivable. 2. ABC gives ordinary financing to the customer. Ex. Receivable is 100k, the financing is only RM90K, and total sale price is RM100K. 2. Customer assigns (as security) the receivables (RM100K) to ABC. 1 APPLICANT /Customer ABC BANK 2 1 2 PAYMASTER ISLAMIC BOURSES (Bursa Suq Al-Sila )
DEBT FACTORING MODEL 2 1. ABC sells a set of identified commodity (with immediate delivery) worth RM90K with a mark up price od RM100K against RM100K customer s receivables. 2. Customer will sell the commodity to Bursa for cash at RM 90K 1 APPLICANT /Customer Commodity worth RM90k Receivables RM100K ABC BANK 1 2 PAYMASTER Customer Sells commodity for RM90k ISLAMIC BOURSES (Bursa Suq Al-Sila )
Among the common mistakes 1. Tripartite Inah 2. Fourpartite Inah 3. The purchase of the wakil for himself
Three Partite Inah (violation of AAOIFI Standard 30/4/5) 1. ABC buys RM10,000 worth of commodity from Broker A on credit. 2. ABC sells the commodity to Customer with mark up price (RM 15,000) on deferred payment basis. 3. Customer sells the commodity to Broker A for cash (RM10,000) ABC Islamic Bank 1 Broker A 2 3 Customer
Three Partite Inah with Hawalah (violation of AAOIFI Standard 30/4/5) 1. ABC buys RM10,000 worth of commodity from Broker A on credit. 2. ABC sells the commodity to Customer with mark up price (RM 15,000) on deferred payment bas 3. Customer sells the commodity to Broker A for cash (RM10,000) 4. Broker A transfers (Hawalah) its right of the sale price (RM10,000) from ABC to Customer. 5.ABC pays RM10,000 to Customer. 6. Customer owes ABC RM15,000. ABC Islamic Bank 1 Broker A 2 5 4 3 Customer
Four Partite Inah. (violation of AAOIFI Standard 30/4/5) ABC Islamic Bank 1 Broker A 2 Customer 3 Broker B
Four Partite Inah with Hawalah(violation of AAOIFI Standard 30/4/5) Broker A transfers (hawalah) its rights (sale price) from ABC to Customer. This cannot be imagined except that Broker B and A are one entity or its proxy ABC buys commodity from Broker A RM 10K on credit ABC Islamic Bank Broker A 1 Hawalah 10k ABC pa Y ABC sells the commodity 2 to customer on deferred payment (mark up price), 15K s 10k Customer Customer sells the commodity for cash to broker B, 10K 3 Broker B
AAOFI Standard 30/4/5 30/4/5.The commodity (object of monetization) must be sold to a party other than the one from whom it was purchased on deferred payment basis (third party), so as to avoid inah which is strictly prohibited. Moreover, the commodity should not return back to the seller by virtue of prior agreement or collusion between the two parties, or according to tradition. AAOIFI standar 30 on Tawaruq, pg. 526
The sale of wakil to himself/a combination between agency to purchase in the first leg and the purchase contract in the second leg (with the absence of 4a and 4b). Violation of AAOIFI Standard 30/4/7 5 a ABC sells commodity to BSAS on spot for cash 6 ABC settles amount due to Customer on deferred payment basis based on terms 5 b Proceeds delivery 4 b Customers sells the commodities to ABC at profit on deferred payment basis Commodity Murabahah House (BSAS) ABC Islamic Bank 4 a Onward delivery of commodity ownership certificate Customer/ Counter Bank 3 a 3 b Ownership delivery on behalf of Customer As an Agent, ABC buys commodity from Broker 1 1 2 Customer requests ABC to act as agent (wakalah) to buy the commodity from the market and subsequently sells the commodity to the Bank Customer wants to make fixed deposit with ABC, with a fixed return
Violation of AAOFI standar 30/4/6 4/6. The contract for purchasing the commodity on deferred payment basis and the contract for selling it for a spot price should not be linked together in such a way that the client looses his right to receive the commodity. Such linking of the two contracts is prohibited whether it is made through stipulation in the documents, acceptance as a normal tradition, or incorporation in the procedures. AAOIFI pg. 256
Cont : Mistakes 4. Unnecessary Delegation (tawkil) to dispose or to purchase the commodity 5.Concluding both the purchase of commodity and delegation to dispose contract at once
Violation of AAOFI Standard no 30/4/7 4/7: The client should not delegate the institution or its agent to sell, on his behalf, a commodity that he purchased from the same institution and, similarly, the institution should not accept such delegation. If however, the regulations do not permit the client to sell the commodity except through the same institution, he may delegate the institution to do so after he, actually or impliedly, receives the commodity. See AAOFI standards, pg. 526.
Cont.Among the common mistakes 6. The debt obligation is established via customer s undertaking, not sale contract 7. Non existence of the commodity 8. No real transfer of ownership over the commodity 9. No proper recording, identification and tagging of the commodity 10. Selling price is not known
Conclusion Among the other Sharīah issues are no identifications of the commodity, no taking ownership prior to sell, charging expensive fee for delivery of the commodity and no observation of the conditions and sequences of the sale transaction which may make it being artificial fancy contract to get liquidity, similar to conventional bank.