Basic mistakes in Murabahah Financing

Some basic mistakes that can be made in practical implications of the concept are as follows:

1. The most common mistake is to assume that Murabahah can be used for all types of transactions and financing. This mode can only be used when a commodity is to be purchased by the customer. If funds are required for some other purpose Murabahah cannot be used.
2. The document is signed for obtaining funds for a specific commodity and therefore it is important to study the subject matter of the Murabahah.
3. In some cases, the sale of commodity to the client is affected before the commodity is acquired from the supplier. This occurs when the various stages of the Murabahah are skipped and the documents are signed all together. It is to be remembered that Murabahah is a package of different contracts and they come into play one after another at their respective stages.
4. It is observed in some financial institutions that Murabahah is applied on already purchased commodities, which is not allowed in Shariah and can be effected on not yet purchased commodities.

Uses of Murabahah:

Murabahah can be used in following conditions:

Short / Medium / Long Term Finance for:

• Raw material
• Inventory
• Equipment
• Asset financing
• Import financing
• Export financing (Pre-shipment)
• Consumer goods financing
• House financing
• Vehicle financing
• Land financing
• Shop financing
• PC financing
• Tour package financing
• Education package financing
• All other services that can be sold in the form of package (i.e. services like education, medical etc. as a package)
• Securitization of Murabahah agreement (certificate) is allowed at par value only. Other wise certain rules of Islamic Finance must be met.

Source: Dr. Muhammad Imran Ashraf Usmani, Meezan Bank’s Guide to Islamic Banking.