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Shari’ah loans (Murabaha)

 Shari’ah loan (Murabaha) agreements are Islamic finance’s answer to debt financing and have become popular in financial institutions looking to offer Shari’ah compliant banking facilities.

A Shari’ah loan seeks to realise the same aim as a conventional loan between a bank and its client, however in a manner that excludes the payment of interest yet still compensating the bank for its time value of money. This is achieved through the sale and purchase of commodities to add a tangible element to the transaction.

The simplified mechanics of a Shari’ah loan are featured in the diagram below:

For Saracens

 

 

 

 

 

 

 

Steps of a Shari’ah loan (Murabaha) transaction

(1)  The lender will purchase commodities at a price (cost price) the borrower wishes to borrow from a commodity seller;

(2)  The borrower then purchases these commodities from the lender at the higher price, which is usually the sum of the cost price of the commodities and a pre-agreed profit;

(3)  The lender will on-sell these commodities as the borrower’s agent;

(4)  The lender will then transfer the proceeds of the sale of commodities to the borrower, which will be used as a loan.

We can also assist in providing a working understanding the:

  • Rate of profit
  • Duration of the agreement
  • Early and late repayment
  • Commodities arrangement
  • Providing security / collateral for the loan
  • Financial undertakings

To discuss using a Shari’ah loan (Murabaha) agreement for lending or borrowing, please phone our London office on +44 (0) 20 3588 3500 and talk directly to one of our lawyers. Alternatively, you can request a call back and we will be in touch at a time convenient to you.

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