Your Basic Guide to Commodity Murabaha

Commodity Murabaha has been among the most prominent instruments used in Islamic financing, comprising 92.7% of Islamic finance by the end of 2021, with companies and individuals, particularly in the UAE, increasingly turning to this type facility to finance their everyday needs.

What is a Murabaha facility?

Murabaha is a Shariah-compliant loan used by the borrower to purchase a property, good, or asset. In a typical transaction, the lender purchases the asset (usually through a broker) and then sells it to the borrower at a mark-up or cost-plus profit. 

 The borrower will then pay for the asset over an agreed upon period of time, typically in installments. The lender profits from the marked-up sale of the asset instead of interest on a loan as is typical in non-Islamic banking.

The markup of the sale to the borrower must be fixed at the time of the agreement and cannot be altered or changed.

What can a Murabaha loan be used to purchase?

A Murabaha can be used to finance a variety of goods ranging from consumer goods (such as a car, house, appliances, etc) to capital goods for companies (such as machinery and equipment),

as long as the underlying asset is Shariah-compliant. One cannot, for example, use this type loan to purchase an alcohol distillery.

What is a Commodity Murabaha facility?

A Commodity Murabaha facility (otherwise known as a Tawarruq) takes the Murabaha loan concept a step further by providing the borrower with liquidity using the sale of an asset obtained through a Murabaha loan.

 In this facility, the lender purchases an asset, then sells or leases it at a markup to the borrower, who will then sell off the asset, through the lender or the lender’s broker.

This provides the borrower the flexibility of obtaining the liquidity without tying them down with the initial underlying asset, allowing them to use the transaction to fund schooling, traveling, and other personal and business finance needs.

What penalties could be incurred in the event of default or late payments?

In typical Murabaha contracts, lenders usually include provisions in the event of late payment or default. However, the primary protection that the lender has is the asset itself, and ownership of the asset will simply be retained by the lender if the borrower fails to meet their obligations.

Some banks in the UAE will include a cancellation fee that is non-refundable with a fixed penalty plus VAT. Unlike in non-Islamic banking, where defaults could see the borrowers interest increased, the marked-up asset price does not change in the event of a default.

In other jurisdictions, such as Saudi Arabia, banks could place the defaulting borrower on a blacklist that is shared with other financial institutions.

Where can one obtain a Commodity Murabaha facility?

As one of the most commonly used Shariah compliant facilities, it is provided by almost all Islamic financial institutions, particularly in the UAE. Increasingly, however, fintech companies and peer-to-peer lending platforms have been incorporating Commodity Murabaha in their Islamic financing suite of services.

This includes e&’s Beehive, which launched its Commodity Murabahah Trading Platform (CMTP) in cooperation of UAE'S Dubai Multi Commodities Centre (DMCC).

The platform provides a one-stop shop for the transactions required for a commodity Murabaha facility, connecting lenders, borrowers, brokers and assets.