Reject the Goods Bought by a Bank - Assignment Example

Murabaha Question One It is allowed for the client to reject the goods bought by a bank under Murabaha agreement due to defect in the goods. Under Murabaha, the seller discloses the costs and profit charged there. The price of the sale can be spotted and deferred. In a financial institution, the bank will, upon the request made by the customer, purchase the goods from a supplier and sell them to the customer for either immediate payments or on deferred payment basis (Thomas 66). Under Murabaha, the bank must have actual possession of the goods and goods must exist at the time of Murabaha execution (Lewis and Hassan 152). Murabaha is a contract of trust, thus, the goods must be of the quality agreed between the bank and customer. The bank bears the risks that the goods may develop a defect or may be destroyed, since Murabaha is executed at the second sale. The customer can reject the goods if they contain defects or for the reasons of unsatisfactory performance (Hayes and Vogel 141). Question Two It is prohibited to sell Waqf (endowments) since they are not owned by a specific person and for any sell to be valid; the owner must be unambiguously identifiable. Istibdal, which is the sale of Waqf land, can be entered in Murabaha agreement, since the proceeds are used for the purchase of another land to be used for the Waqf purposes. However, according to Hanbalis, the benefits of Waqf cannot be obtained where the land is ruined, barren or is a mosque that is not used for prayers (Iqbal and Greuning 40). Question Three A bank conducting a purchase under a Murabaha contract may open a documentary credit in a foreign bank and receive commissions. Fiqh Academies prefer the prevention of banks taking the commission since it may demand the value of the guarantee in case of buyer defaulting on the agreement (Schoon 32). The bank should notify the buyer of such commission and pass it to the buyer by a way of reduction in the Murabaha contract price (Haron and Azmi 400). Question Four It is not allowed for the bank to finance a concluded deal between the client and owner of goods under a Murabaha contract. Murabaha entails the selling of an identifiable good that the seller owns, disclosing the costs and adding a mutually agreed mark up to the cost of the goods (Saeed 58). Murahaba agreements are not valid for the goods which are not bought or in the possession of the bank (Kettel 48). If the concluded deal is for a specific transaction, the bank should request for evidence of the termination of the concluded deal before it can enter in to a Murabaha agreement with the client. According to the Quran, Allah permitted trade but prohibited usury (Kettel 49). Question Five It is allowed to include insurance expenses to the cost of goods being sold under Murabaha. If the laws and regulations of the trade make it mandatory to insure the goods, the bank should comply accordingly and include the insurance expenses in the costs of goods under the Murabaha contract. Irrespective of any insurance cover or not, the bank is liable for the damages caused on the goods while on transit (Visser and Visser 58). In the event of damage of the goods and compensation is paid by the insurance company, the bank should reduce the price of the goods by an amount equivalent received in lieu of damages to the goods. The bank cannot hand over the compensation to the client without decreasing the price of the goods (Visser and Visser 58). Question Six It is a condition that the goods under Murabaha contract should be known and identifiable. The original costs and expenses incurred by the original buyer should be declared openly in the contract (Kettel 47). The asset should be in possession and under the name of the seller before execution of Murabaha contracts. The asset must be existing at the time of sale and the owner should have the rights and liabilities of the goods including the risks of defects at the time of sale (Lewis and Hassan 152). The price and delivery of the asset must be certain and not conditional (Kettel 47). Question Seven Roll-over in Murabahah is not allowed since each Murabaha agreement is made for the sale of a particular asset. A new Murabahah can only be made for the purchase of new assets. Roll-over simply means establishing a new Murabaha for the same asset that has not been paid for by the client and adding an additional mark-up. The additional mark-up is prohibited since it is considered as Riba in Islamic finance and results to the client paying more than the amount of debt stipulated in the initial Murabaha contract (Vogel and Hayes 186). Murabaha is not a loan but a sale of commodity thus the ownership of the asset transfers to the buyer after the sale agreement, the bank can only claim the price of the asset (Vogel and Hayes 186). According to Shariah, the bank should reschedule the debt at its discretion without changing the initial agreement price. A period of between 1 to 2 days should be allowed before the formation of a new Murabaha agreement and the maturity of the previous agreement. Any penalties for late payment should be transferred to the bank’s charity account (Ayub 5). Question Eight Under early settlements of the Murabaha transactions, it is not possible to allow the client a rebate for his early payments. Such clause cannot be included in Murabaha contracts since it is impossible for the bank to issue a binding promise to discount the debt or relinquish portion of the profits in accordance to settlements made by the client (Ayub 147). The Islamic Fiqh Academy of Jeddah is of a different view, since it has confirmed that the Islamic banks can discount the debts or issue rebates for early payments only if no such clause is mentioned in the Murabaha transaction. The Islamic banks have the option of issuing rebates but the issue of rebates to the customer is not binding to the bank (Ayub 4). Question Nine In the case goods are imported by a bank under a Murabahah agreement, the currency conversion rate that should be used to determine contract price is the local currency. Under a Murabaha contract for purchase of foreign goods, the buyer instructs the bank to purchase the goods from the foreign exporter and the bank opens documentary credit. The exporter should ship and dispatch the documents of sale to the bank. The bank should inspect the goods on arrival and pay the exporter. The bank enters in a sale contract with the local buyer after disclosing the costs of the goods and the specified mark up (Hassan and Mahlknecht 160). It is allowed to execute Murabaha transactions in the foreign currency but it should be converted to the local currency at the currency conversion rate prevailing at the date of purchase from foreign importer. According to Shariah, the contract price should be known by all the parties at the date of formation in order to be valid (Hassan and Mahlknecht 160). Works Cited Ayub, Mohammad. Understanding Islamic Finance. New Jersey. John Wiley and Sons. 2007. Print. Haron, Sudin, and Nursofiza, Azmi. Islamic Finance Banking System. London. McGraw-Hill. 2009. Print. Hassan, Kabir, and Michael Mahlknecht. Islamic Capital Markets: Products and Strategies. Chichester. Wiley. 2011. Print. Hayes, Samuel, and Frank Vogel. Islamic Law and Finance: Religion, Risk and Return. Hague. Kluwer Law. 1998. Print. Iqbal, Zamir and Hennie, Greuning. Analyzing Risk in Islamic Financial Institutions. Washington, DC. World Bank. 2007. Print. Kettel, Brian. Introduction to Islamic Banking and Finance. Chichester. Wiley. 2011. Print. Lewis, Mervyn, and Hassan, Kabir. Handbook of Islamic Banking. Cheltenham. Edward Elgar. 2007. Print. Saeed, Abdullah. Islamic Banking and Interest: A Study of the Prohibition of Riba and Its Contemporary Interpretation. Laiden. Studies in Islamic Law Society. 1996. Print. Schoon, Natalie. Islamic Banking and Finance. New York. Wiley. 2010. Print. Abdulkader, Thomas. Structuring Islamic Finance Transactions. London. Euromoney Books. 2005. Print. Visser, Hans and Visser, Herschel. Islamic Finance: Principles and Practice. Cheltenham. Edward Elgar. 2009. Print. Vogel, Frank and Hayes, Samuel. Islamic Law and Finance: Finance, Risk and Return. Hague. Kluwer Law. 1998. Print. Read More