Master Murabaha Financing Agreement

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Murabaha Documentation & Practical Issues
There are a number of documents involved in a Murabaha financing transaction. The most essential of these documents are: * Master Murabaha Financing Agreement
* Agency Agreement
* Order Form / Draw Down Notice
* Declaration
* Purchase Evidences
* Demand Promissory Note
* Payment Schedule
Master Murabaha Financing Agreement (MMFA)
* Its an agreement between the client and the Bank whereby the client agrees to purchase goods from the Bank from time to time as per the terms and conditions of this agreement. * This is an overall facility agreement under which various Sub-Murabahas may be executed from time to time. * Hence it needs to be signed once at the time the facility is sanctioned. Agency Agreement

* Through this agreement, the Bank appoints customer its agent to select and procure specified goods for the Bank. * This agreement needs to be signed once between the client and the bank to cover the specified agency period.The disbursement of funds is done under this agreement. * The customer should define a comprehensive list of assets and commodities that he may procure during the course of business from time to time. Order Form

* This document is executed at the time of each sub-Murabaha request i.e. each time when the customer requires Murabaha for purchase of assets. * Through this document customer requests the bank to purchase the assets from the supplier and undertakes that it will purchase the assets from the bank once the bank acquires them from the market. * The customer also undertakes to compensate for the actual loss the bank may suffer in case that he fails to purchase the assets from the bank. Declaration

* This is the most important part of the Murabaha process. * Declaration is to be signed by the customer immediately after the purchase of goods as Bank’s agent but before the actual consumption. * This document establishes the actual sale transaction, i.e. transfer of ownership of goods from the Bank to the customer * At this stage the specific details of the assets must be known i.e. quantity, quality, cost etc. * Purchase Evidences in the form of bills, sale invoice, sales tax invoice must be furnished along with the Declaration specifying the full details of the goods purchased. * The cost of goods must be inclusive of all cost including sales tax, transportation and handling etc. * Proper timing of declaration is extremely important especially in cases of perishable or immediately consumable commodities. * Murabaha price (Cost of Goods + Profit) should be determined at this stage and stated clearly in the Declaration. Payment Schedule

* The Payment Schedule specifies the amount that the Client will make from time to time or at once towards the payment of Murabaha price. * This shall be executed after the execution of Declaration. * The dates mentioned in the schedule corresponds to the day when the payment becomes due on the client. Practical Issues in Murabaha

* Timing of ‘Offer & Acceptance’
* Rollover in Murabaha
* Rebate on Early payment
* Penalty in Late payment
* Subject Matter
* Purchase Evidence
* Direct Payment
* Profit recognition
* Training of Customer & Bank staff
* Process of Murabaha differ from product to products
1. Timing of ‘Offer & Acceptance’
* A Murabaha financing arrangement consists of a series of documents to be executed at various stages, the sequence and timing of which is extremely important. * Through this, client and the bank execute an important step of a valid Murabaha sale i.e. Offer & Acceptance. * This is to be signed by the customer when it has purchased and taken possession of the goods as the Bank’s agent. * Offer & Acceptance must be signed while the goods are still in existence and have not been used in the production...
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