As a part of Bank Negara Malaysia’s initiative to support Islamic Finance development in. Malaysia, Commodity Murabahah Programme (CMP). PDF | On Jan 1, , Othman Cole and others published COMMODITY MURABAHAH TRANSACTIONS (CMT): A SHORT-TERM LIQUIDITY. Commodity Murabahah Term Financing-i (CMTF-i). CMTF-i can be applied for working capital and for refinancing purposes. Type of Facility: Term Financing.
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For the past few years, controversies have arisen over the use of several working capital products, which aims to provide one party with cash and another with debt. As with all Islamic transactions in the nurabahah, an underlying asset is a key requirement to ensure the transaction is valid in the Islamic Banking world.
The main challenge for a customer requiring cash for their use but without any collateral or asset to enable the economic transaction to take effect, Banks have obtained alternative structures to provide the customers with the much-needed cash. The structures of Bai-Inah and Commodity Murabaha are introduced as possible solutions.
The word Tawarruq is also greatly been used to reflect comkodity involving Commodity Murabaha. Although the Bai-Inah structure is generally rejected by international scholars except for in Malaysia, the remaining Tawarruq arrangement with Commodity Murabaha are still accepted throughout the Islamic Banking world.
Recent pronouncements by some scholars that the Tawarruq arrangement is not permissible only highlights the challenges in Islamic Banking.
There has been on-going questions on the validity of the contract and the rationale for doing so. The Legal Maxim used is that Tawarruq satisfies people needs and meets their requirements i.
Before moving further, is there a difference between Commodity Murabaha and Tawarruq?
Wakalah, Murabahah and Musawamah. Between scholars and practitioners, these terms are now used interchangeably. But in my humble opinion, I subscribe with BNM view that Tawarruq is the over-arching arrangement where multiple contract work together; Wakalah, Murabahah and Musawamah to complete the Tawarruq arrangement. We have to first ask this question, Is there anything fundamentally wrong with the contract of Tawarruq?
Why is it being put to question? In the olden days, this structure would be a normal trading scenario, where there is real sale transactions involving goods or commodities. But this Cash is derived from real trading. Now, from the above scenario, not everyone is skilled to obtain Cash by way of going into the physical market, finding buyers and negotiating price with suppliers. Customers seeking Cash, for whatever reasons it may be, will approach people who are skilled to conduct such endeavour.
Banks, seeing the need for such services or facility, have built a stable infrastructure to support the process.
Financing : Tawarruq (Commodity Murabaha)
With the above infrastructure, Sharia is able to monitor and regulate the implementation of the Tawarruq transaction, ensuring its validity. A Tawarruq transaction or arrangement will then involve a series of sale contracts whereby:. The commodity transaction is a means to facilitate the attainment of cash and liquidity, and while the beneficial commodity ownership must changes hands during the transaction, it is rarely the case that the Customer actually takes physical ownership of the commodity as this is not the main intention of the Customer.
However, the option to take physical delivery of the commodity must always be present to the Customer should they choose to murxbahah the physical delivery. Another key consideration is that the contract must stand-alone and murabayah be conditional on the completion of the other contract. Based on the above structure, the Tawarruq arrangement must clearly consist of 2 separate standalone contracts. The legal documentation, as far as possible, must also reflect the same.
It puts the structure under extreme criticism as it is argued that this is a pre-arranged transaction of no xommodity value just for the purpose of creating a debt, without the ability to separate the sale and the buy-back contract. Under a Tawarruq arrangement, it is deemed that the interconditionality aspect of the contracts are immaterial. This is because the Bank has no use of the commodity being traded, since it is a non-Bank Asset not used commoditg Bank being traded by third parties in the open commodities market.
The commodiity criticisms revolves around the issue of ownership constructive ownership vs physical ownership as the commodities are usual located off-site and commodigy ability to actually verify the commodities being traded is in existence and as per the description or not. However, most of the established commodity brokers have started to make available nearby commodities warehouse locations, nearer to many business locations.
Deposits : Tawarruq (Commodity Murabahah)
For example, a commodity broker may set up a warehouse in Singapore to cater for the commodities requirements from Malaysia, Indonesia and Brunei. This helps address Shariah Committee concerns as these commodities become more accessible for inspection, and ownership verification.
The intention is to create debt. Practitioners have to be more vigilant in ensuring compliance to the rules of Commodity Murabaha transaction in a Tawarruq arrangement to avoid damaging the reputation of the contract by taking commodty. Islamic Banking structures are always meant to be evolving as new discussions are undertaken, new regulations imposed and new solutions found.
Until then, Islamic Banks will continue to utilise these structure to avoid customers going into Riba-based loans as their financial solution. I replied to that question with some illustration on your question on 7th May Hope that clears your question. As you are aware, these products are based on a sale-based contract commodity Murabahah and one of the conditions to Murabahah is the sale price which includes profit element.
In this case, the Bank exercises its right to pay murqbahah profit upfront, leaving only the principal amount to be paid on the expiry date. Murabahah contract remains intact cpmmodity all the pillars to Murabahah are met buyer, seller, price, subject mruabahah, offer and acceptance.
Murabaha – Wikipedia
The bank purchases the commodity and holds the commodity on my behalf. The bank sells commodity to company Y. Company Y buys commodity from the bank.
The bank receives cash from company Y. It will have to be illiquid for you as the Bank will be investing that money to earn a return that ideally be more that what they have paid to you upfront.
If you choose to liquidate the deposit earlier than the agreed maturity, the principal returned to you will be the net figure of RM1. Technically you will just receive a total of your full principal only, without any profit.
I understand that upfront profit would entice depositors to place commodity deposits, enabling banks to pool murzbahah create bigger resources for other investments.
Hi Shafiqah, apologies for replying late. I actually overlooked my response before I realised I responded to your earlier question and not this one. In Structured Deposits, commoditty Bank will invest your funds in a fixed return instruments. For example you placed RM, as your investment.
If the Bank can find an investment that pays The calculation is as follows: Initial PrincipalContracted Rate with customers 9.
Profit Portion paid upfront to customers contracted 9, Therefore, Bank will be able to pay back the customers principal after days, and had paid the profit up-front. Now of course, if the Bank can find a fixed return investment of It is a matter of the Bank finding the best returns for the actual cash on hand i.
Again the benefits is that the customer perceive that they are going into a good deal, as they get the profit now, and the principal is guaranteed on maturity. Hi i refinance my house for rmk,, In the letter offer its written something commpdity commodity murabahah…. What does that means… My monthly payment is rm1. What benefits ill receive…. In a normal home financing structure, the bank can either do the following: All the above structure involves the underlying asset of the subject matter itself the house to validate the transaction and contract.
However there are certain structures that, coming from various types of issues for example ownership, warranties, etc has decided to use an underlying asset which is not the subject matter to validate the contract. The asset is a different asset altogether i.
The purpose of using commodity is because of certain restrictions in the ownership structure for an existing product. There is no difference in terms of impact to you whether the financing is via commodity murabahah or Diminishing Musyarakah.
The only benefits that Murbaahah can see from customer point of view is that the documentation can be simpler or even cheaper from stamp duty savings.
I need your comomdity on which package is good… I would like to refinance my house… Should i take Commodity Murabahah or Musharakah Mutanaqisah? I am so confused which is better in terms of everything especially costs, legal etc. To be honest, there really is not much difference in terms of package or costing either for tawarruq home or DM home.
DM generally have more documents to sign because it is more comprehensive.
Under tawarruq, you just need to ensure you pay the debts only, as it is a debt creation mechanism. But net impact, both are the same. Salam En Amir, my company is involved in the trading of LPG cooking gas and my bank recently changed our financing facility form Accepted Bills AB-i to Invoice Financing-i because they claim that the product being traded should be classified as commodity rather than goods.
Please give us your thoughts on this. AB-I is slowly becoming a higher risk proposition to Banks, especially AB-I purchases where it is relying on the contract of Murabahah. There are additional operational and risk elements under Murabahah, with the introduction of the Murabahah standards where holding risks are now expected Commoodity Purchase Xommodity.
Bank holds ownership risks and this do translate to some worries to the Bank. I noticed since last year the year the Murabahah standards were issued that Banks have become very, very selective in offering AB-I purchases under Murabahah, instead opting to Invoice Financing which can be based on the contract of tawarruq.
Under the contract of tawarruq, the commoxity risks are mitigated almost immediately as there are willing counterparties to transact the Assets with. As such, a lot of Banks has started to move their portfolio to tawarruq commodity murabahahas the default offering, as well as better pricing can be charged by the Bank. Unfortunately, under Invoice Financing, there are also operational risks such as double financing of invoices but this allows the Banks to seek higher pricing to compensate the risks the Bank will take.
It is unfortunate that the Banks are re-looking at long time facilities and changing them to improve profitability and liquidity.
– Commodity Murabahah Term Financing-i (CMTF-i)
This allows the Bank to earn more than usual. I truly want to say, that your blog related to Islamic Banking concepts are very imformative with proper examples. I take this opportunity to thank you for doing this. But currently I have a doubt pertaining to Tawarruq, which is, when Bank is appointed as an agent on behalf of the customer to dispose the commodity in the market, there will be an agency agreement signed Wakala agreement right?
Following this, is the bank eligible to charge agency fees to the customer for being and acting as an agent? Yes there is an Agency contract in a Tawarruq arrangement. And yes a Wakalah agency entitled to a Wakalah fees.
In the middle east this will be a talking point but in Malaysia, that fees is generally waived as you rightly pointed, banks will be earning from the financing itself.
In terms of its application under Commodity Murabahah, you have to remember that the purpose of Term Deposit is for the creation of a financial obligation that leads to profit for the depositor. For this purpose, since profit can also be derived from a sale-based transaction, Commodity Murabahah becomes a suitable structure to use.