Tijarah financing, often referred to as “Tijarah” or “Tijara” is a term used in Islamic finance to describe a specific type of trade or commercial financing arrangement that adhere to Shaira (Islamic Law) principles. Tijarah financing is based on the concept of buying and selling goods, with the goal of generating profits while avoiding interest (riba) and adhering to other ethical and legal principles of Islamic finance.
Here is how Tijarah financing typically works:
- Goods Purchase: A financier, which can be an Islamic bank, financial institution, or investor, purchases specific goods or commodities based on the request of a customer (usually a business or individual). These goods can be tangible items like machinery, equipment, inventory, or even real estate.
- Ownership Transfer: Upon purchasing the goods, the financier becomes the owner of the items. It’s important that ownership is transferred to the financier, as this distinguishes Tijarah from a traditional loan arrangement.
- Sale to Customer: The financier then sells the goods to the customer at an agreed-upon selling price, which includes a profit margin. This selling price is often paid in installments over an agreed-upon period.
- Profit Margin: The profit margin is predetermined and disclosed to the customer at the outset, ensuring transparency in the transaction. This profit margin replaces the concept of interest, and it’s how the financier earns a return on their investment.
- Payment in Installment: The customer pays for the goods in installments according to the agreed-upon terms. These payments cover both the cost of the goods and the profit margin.
- Risk and Responsibility: Once the goods are sold to the customer, the responsibility for maintaining, insuring, and managing the goods typically transfers to the customer, as they are now the owner.
Key features and principles of Tijarah financing include:
- No Interest (Riba): Tijarah financing is compliant with Shriah principles because it does not involve the payment or receipt of interest, which is prohibited in Islamic finance.
- Asset-Based: The financing is asset-based, meaning it involves the purchase and sale of tangible assets or goods.
- Ownership Transfer: Ownership of the goods is transferred from the financier to the customer at the time of sale, ensuring a legitimate exchange.
- Transparency: The profit margin is disclosed upfront, and the terms of the sale are transparent to both parties.
- Risk-Sharing: The customer and the financier share the risks and rewards associated with the transaction. If the goods loose value or are damaged, the customer bears that risk.
Murabaha financing is a common Islamic financial transaction that adheres to Sharia (Islamic law) principles. It is a form of cost-plus-profit arrangement used for various financing needs. The primary feature of Murabaha financing is the sale of goods at a markup, which replaces the concept of interest found in conventional loans.
Here is how Murabaha financing typically work:
- Corporate Customers/Buyer and Bank have signed an agreement to enter Murabaha Program.
- Fauree Integrate with corporate customer/buyer ERP system.
- Sends the request to all vendors/suppliers via Fauree platform
- Corporate customer appointed as agent to purchase goods on bank’s behalf
- Corporate buyer will raise PO/Purchase requisition to supplier
- Corporate customer/buyer purchases goods on bank’s behalf and takes their possession
- Based on PO, supplier/vendor will raise invoice from Fauree platform
- Supplier/vendor will sell the goods to the bank via Fauree platform
- Supplier/vendor deliver goods at customer warehouse
- After accepting goods, Corporate Customer will issue GRN.
- After accepting the goods and approve the invoice, Bank disburse funds to supplier/vendor
- Corporate customer makes an offer to purchase the goods from banks
- Corporate customer pays agreed price to bank according to an agreed schedule, usually on deferred payment basis.
Key features and principles of Murabaha financing include:
- No interest (Riba): Murabaha is considered compliant with Islamic law because it does not involve the payment or receipt of interest, which is prohibited in Islamic finance.
- Transparency: the profit margin is clearly disclosed to the customer upfront, ensuring transparency in the transaction.
- Asset-Backed: The financing is typically asset-backed, meaning that the asset being purchased serves as collateral, providing security for the financier.
- Ownership: Ownership of the asset is transferred to the customer immediately, making the customer responsible for ownership-related costs like maintenance and insurance.
- Not Speculative: Murabaha is intended for the purchase of tangible assets or commodities, not for speculative trading.