BNK610 ASSIGNMENT 1 SOLUTION 2023 | BNK610 ASSIGNMENT 1 FALL 2023 | BNK610 ASSIGNMENT 1 2023 | ISLAMIC BANKING PRACTICES | VuTech

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Question No. 1

The Case:

Murabaha, also known as ‘cost plus profit sale’ is a type of sale in which the seller not only discloses the cost of the product but also the profit which he charges while selling goods to the customers. Financial institutions, like banks, serve as financial intermediaries rather than conventional retail stores. Therefore, the procedure of conducting Murabaha transactions by Islamic banks is a little bit different than individual sellers. Being a student of Islamic Banking Practices (BNK610), you are required to write the complete procedure of Banking Murabaha by elaborating various steps involved in it.

Solution:

Banking Murabaha Procedure:

1: Client Request:

The process initiates when a client expresses the desire to purchase a specific commodity through Murabaha financing. This could be anything from a home to a vehicle or machinery.

2: Application Submission:

The client submits a formal application to the Islamic bank, detailing the requested financing amount, the intended commodity for purchase, and any other relevant information.

3: Approval and Due Diligence:

The bank conducts a thorough assessment of the client's financial position, creditworthiness, and the proposed transaction. Due diligence is crucial to ensuring the Sharia compliance of the transaction. If the application is approved, the bank proceeds to the next step.

4: Agreement Drafting:

Upon approval, the bank and the client enter into a Murabaha agreement. This agreement outlines the terms and conditions of the transaction, including the cost price, the profit margin, and the mode of payment.

5: Purchase of Commodity:

Instead of directly giving money to the client, the bank purchases the requested commodity itself. This involves the bank negotiating with suppliers and acquiring the commodity at an agreed-upon cost.

6: Sale to the Client:

After acquiring the commodity, the bank sells it to the client at a predetermined price, which includes the cost and an agreed-upon profit margin. The sale can be on a deferred payment basis, where the client pays in installments, or through other mutually agreed-upon terms.

7: Repayment Structure:

The bank and the client agree on a repayment structure, specifying the amount and frequency of payments. This structure is designed to ensure that the bank receives its profit while accommodating the financial capacity of the client.

8: Possession and Delivery:

Upon completion of the sale, the ownership of the commodity is transferred to the client. If the commodity is a physical asset, the bank ensures its delivery to the client.

9: Monitoring and Documentation:

The bank monitors the client's compliance with the agreed-upon terms. Documentation of the transaction, including the Murabaha agreement and payment records, is maintained for transparency and audit purposes.

10: Completion and Closure:

Once the client fulfills all payment obligations, the Murabaha transaction is considered complete. The client obtains full ownership of the financed commodity, and the bank concludes its role in the transaction.

This procedural outline ensures that the Murabaha transaction adheres to Islamic principles, emphasizing transparency, fair pricing, and the avoidance of interest (riba). Islamic banks play a facilitating role in enabling clients to make purchases without resorting to interest-based financing.

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