Topic_4___Murabahah_revised_

Currency trading cannot be conducted through

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Currency trading cannot be conducted through murabahah. Murabahah cannot be used for financing overhead expenses, such as staff salaries, paying electricity bills, or setting off the debts payable to other parties. Murabahah cannot be used for refinancing the commodity which has been purchased by the client.
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Commodity Murabahah It refers to a short term placement mechanism involving purchase and sale of commodities in international markets, e.g. London Metal Exchange (LME). For liquidity management purpose the bank resorts to commodity murabahah. One bank (in need of funds) and another bank (intends to place funds) select any commodity; the surplus bank purchases the commodity on cash payment from the market, then the deficit bank purchases it from the surplus bank on murabahah and then sells it again in the market at spot-price. Issue on tawarruq is involved.
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The Nature of Tawarruq Tawarruq in commodity murabahah is an extension of the murabahah for the purchase orderer. It is done by reselling the murabahah object to a third party in order to get cash. An organized form of tawarruq (tawarruq munazzam) is condemned by Muslim jurists. The Shari’ah scholars and expert in Islamic finance advise that Tawarruq practice must be of limited use only for meeting unavoidable liquidity needs of the corporate sector. Widespread use of such practices is harmful to the Islamic banking industry in the long run.
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Example of Liquidity Management Central Bank of Malaysia purchases the commodities from Broker A on cash basis. For example, RM 1 million. Alternatively, the Central Bank of Malaysia can appoint Bank B (that faces temporary liquidity problem) as its agent to buy the commodities from commodity market. Bank B will receive the funds for the purchase of commodities on spot basis. The ownership of the commodities is then transferred to the Central Bank of Malaysia. (Step 1) Thereafter, the Central Bank of Malaysia sells the commodities to Bank B on deferred price (cost price plus profit margin). Hence, the ownership of the commodities is now transferred to Bank B. (Step 2) Bank B sells the commodities to Broker B in on the spot at the original cost price to net off the commodity position that it holds when it purchased from Central Bank. (Step 3)
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Commodity Murabahah Program for Liquidity Injection Commodity Broker B Commodity Broker A Bank B Central Bank of Malaysia (1) (2) (3)
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Personal Financing through Tawarruq If a client needs cash for whatever purpose, the bank may arrange to sell a commodity to the client through murabahah, and then the client will resell the commodity to a third party for the cash. The client is getting the cash from the third party, while he is indebted to the bank for purchasing the commodity through murabahah sale. In the accounting report of the bank, tawarruq does not appear, what does appear is murabahah, i.e Murabahah receivable.
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