Though Murahaba is not unislamic, it is considered a borderline transaction. It has been allowed by the ulema to make a start in the absence of real Islamic products, but not on a permanent basis
CONSUMER financing schemes are in vogue these days and Murahaba is the relevant financing instrument employed by banks and institutions dealing with Islamic banking. In its present form, Murahaba is not unislamic, but it is considered a borderline transaction. It has been allowed by the ulema to make a start in the absence of real Islamic products, but not on a permanent basis.
In the present banking system, interest is calculated up-front for the period of instalments and added to the selling price. In Murahaba, the price is fixed after adding the agreed profit to the cost of goods, and instalments are determined after that. In fact, banks also add markup in addition to the profit already charged by the traders, and then the instalments are determined.
In order to be fair to the buyer, the only way is to determine the instalments on the basis of the existing cash price, without adding any interest or markup. This is only possible if we adopt the Islamic economic system instead of transforming the present banking system into Islamic banking. The banks, however, can become active partners in the process.
As a test case, we can try to devise an alternative mode of Murahaba in an attempt to establish the credentials of the Islamic financing model.
The essence of the product is that any trading house, company or retailer interested in expanding business by way of promoting instalment-based transactions can approach a bank for assistance. Instead of financing the individual, the bank can provide relevant guarantees to the trader for each sale to its customer, and will charge a nominal processing fee. In case the customer fails to repay the instalment, the trader may claim the outstanding amount from the bank.
The scenario involves dealing between the bank and the trader, between the trader (seller) and the customer (buyer), and between the bank and the customer. Let’s have a look at each of them:
THE BANK & THE TRADER: The trader will enter into an agreement with the bank to guarantee its instalment-based sale to its customers. This will be a general agreement setting all the terms and conditions to ensure a smooth functioning. The main features of the agreement shall be:
* Each item sold on instalments to the customer will be treated as one separate sale contract, and the bank will provide the guarantee for that contract with proper contract number for record and identification.
* The trader will maintain his portfolio, and inform the bank on receipt of each instalment to reduce its liability under the guarantee till it is finally adjusted.
* In case of non-receipt of instalment, the trader will act quickly and seize the goods on behalf of the bank.
* After the seizure, he may claim the balance amount outstanding from the bank either by re-buying from the bank and claiming the difference, or by reselling the goods and claiming the difference after adjusting sales proceeds, against written consent of the bank.
* The agreement will cease to exist and the bank will be free of any liability and obligations to the trader if mala fide, superfluous, bogus, fraudulent intentions or transaction are found; or if he fails to act diligently and negligence is proved; or if all the conditions of the agreement have not been fulfilled.
* The trader will obtain the guarantee from the third party on appropriate forms and record will be kept and presented at the time of issuance of the guarantee.
* The pre-approved limit will be strictly adhered to.
* The customer will maintain a Current account with the bank and all instalments will be deposited in that very account.
* The customer will supply full statement of outstanding liability to the bank.
* The trader will be bound to complete all the formalities required from time to time.
* On receipt of completed documents, the bank will have the final decision to accept or reject the application. After the signing of the agreement, the guarantee limit for each trader will be processed and allocated as per the bank’s normal policy for creditline approval.
Since no collateral is involved, therefore the following criterion shall determine the guarantee limit:
a) Audited balance sheet or annual turnover declared in the income tax return.
b) Certificate or statement issued by the supplier or the manufacturer, showing total purchase by the trader during the year.
c) Certificate issued by the Chamber of Commerce or any other trade organization concerned, confirming business reputation, integrity, fairness of dealings, and number of years in the business. d) In case of a new business, two references from well established businessmen.
e) On the basis of turnover and reputation, the bank will take the final decision at its sole discretion.
f) The guarantee limit will be reviewed annually.
g) Since the labour, work and time of the bank is involved in processing the limit, a Facility Fee will be charged on an annual basis.
THE TRADER & THE CUSTOMER: Once the trader has the agreement regarding his overall credit limit, he may offer the product to his customers by fulfilling certain formalities. First, a comprehensive form shall be prepared to serve the dual purpose of being a formal application to the trader as well as of being an agreement of sale and purchase between the trader and the buyer.
At least the following documents will be required and should be submitted to the trader to assess credit worthiness and eligibility:
a) The latest salary statement (for salaried persons) or the last income tax return (for the self-employed) as proof of income.
b) Copy of the National Identity Card.
c) The last utility bill paid (for address verification).
d) Credit card statement, if applicable (for verification of credit history).
e) Certificate of employment issued by the employer, describing the nature of employment.
f) Bank statement for the preceding six months.
g) Personal guarantee of two individuals.
All these documents shall be forwarded to the bank concerned which will approve or reject the individual’s application, and the bank’s decision will be binding on the trader.
In case of approval of the guarantee, the trader may release the goods to his customer after obtaining the letter of hypothecation and promissory note in favour of the bank.
THE BANK & THE CUSTOMER: In case of default by the buyer, the bank will pay the amount of outstanding instalments to the trader under the guarantee, provided the goods have been seized by the trader. This will ensure fairness on the part of the trader. The bank may then initiate legal action against the buyer and the guarantors for recovery of damages and losses.
ELIGIBILITY: While the product shall be available to Pakistani nationals, foreigners employed by multinational or foreign firms temporarily residing in Pakistan may also be eligible for it, provided their employers furnish a guarantee or undertaking that all outstanding instalments, if any, will be cleared before their departure from the country.
Under the scheme, only products made and/or assembled in Pakistan will qualify for approval. Imported goods and items not carrying valid warranty by the manufacturers will not qualify under the product.
Similarly, the repaying capacity of the buyer in view of his income level shall be determined by the bank according to its own credit policies. For instance, the parameter for financing household items may be fixed in a range between Rs 5,000 and Rs100,000. Likewise, the minimum repayment period for goods up to Rs50,000 may be set as 12 months, and for those up to Rs100,000 shall be 24 months.
The total accumulative instalments from different institutions should not be more than 30 per cent of the buyer’s take-home salary.
The requirement of two guarantors may be waved if the employer is willing to give an undertaking that the instalment will be deducted at source at the time of salary disbursement till the payment of the last instalment.
The bank will have a Guarantee Department to handle this product and will maintain proper accounts and records
The salient features of the product are:
* It will not put any extra burden on the buyer because there is no additional interest or markup involved.
* It will encourage the local industry to increase productivity.
* It will take care of the credit risk of the small traders or businesses without offering any collateral to the bank for securing their credit-sale portfolio.
* It will stimulate business activities of small-scale traders and businesses.
* Since this product does not require any collateral from the traders as such, they may use their available collateral to obtain extra finance from other banks to improve their liquidity and working capital.
* The traders may use their limits up to the extent of the available balance provided by the repayment of the monthly instalments.
* It will generate healthy competition among small-scale traders and also improve their services.
* The traders will be in a better position to negotiate with the manufacturers for better credit deals to reduce the financial cost.
* As warranty from the manufacturer is required, thus quality of after-sales service will also improve.
* The buyer will automatically become a client of the bank, and this will enlarge the deposit base of the bank concerned.
