Islamic Finance Instruments gif Sell
Broker B,
at a profit & deferred payment Receive
Sales proceeds at maturity
Receive funds from Investor (to pay Broker A,)
Settle Investor (Sales proceeds Iess Agents fees)
Funds Flow Commodity Flow
Conventional Bank (Agent)
Buy Pay Spot
Broker A,
Islamic Bank/Investor
• Commission / Fees is paid to the conventional bank for agency and to the brokers for sale and purchase of goods. These costs are made part of the price.
From risk management perspective the greatest ad- vantage this transaction enjoys vis a vis other more ac- ceptable (Shariah wise) liquidity management instru- ments such as Ijarah Sukuk is that it can be entered into at the discretion of the investing Islamic bank. In case of Ijarah Sukuk the bank has to keep an eye on the calendar to see when a new issue is offered by the issuer except if a chain of sukuk is accessible with intermittent issues bridged at expected gaps on or be- fore maturity of each issue.
Understanding Commodity Murabaha - Simpli- fied Process Flow of Transaction for Attracting Deposits
This transaction is also used to seek deposits. Follow- ing is a simplified version of the transaction process flow as adapted from the Treasury Deposit Leaflet of Islamic Bank of Britain.
• Islamic Bank in the capacity of Agent of the cus- tomer takes the deposit.
• The bank on behalf of the customer buys a com- modity on e.g. London Metal Exchange and also sells it on cost plus profit deferred payment basis (the Islamic bank may itself act as buyer here). The customer is paid the principal plus profit at maturity.
The financial institutions then normally sell the com- modity on cash basis to obtain liquidity (In this per- spective they are doing tawarruq to be explained later). The transaction is not violative of Shariah rules if its implementation procedure is in line with the neces- sary conditions laid down by recognised jurists for the relevant contracts.
chart
18.indd 1
Some Reasons for Criticism of the Commodity Murabaha Transaction
• Since the Islamic banking system may not have the required appetite for excess funds (and also if there is lack of Sukuk) the conventional banks are often resorted to by the Islamic banks. The in- volvement of conventional system brings with it a higher probability of lack of availability of Shariah compliance mechanism.
• The probability of assets changing ownership is considered to be low. It is not sure whether the actual quantities of commodities transacted in papers are actually present or not.
• There is no contribution in any growth or develop- ment based economic activity. It is an unproduc- tive way of getting return on liquidity by getting in- volved in trading of a good that is neither needed by the bank nor its client. It therefore according to Salman Syed Ali in his work titled “Islamic Capital Market Products: Developments and Challenges” has “gross allocative and productive inefficien- cy”.
• As most of the commodity transactions occur in Exchanges located in developed western coun- tries e.g. London Metal Exchange it paves way for outflow of resources from Islamic economies which are predominantly less developed.
• It puts limitation on promoting secondary market as trading of receivables is not permitted under Islamic Injunctions.
The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is of the opinion that the commodity murabaha transaction is not invalid. How- ever in view of this author questions regarding it being ideal or not would invite answers that are subject to peculiar conditions in which the said transactions are used.
03/12/2009 20:35:35
2010 October Global Islamic Finance 45
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