The Murabaha That Stops Being a Sale
Al-Noor Bank has a corporate murabaha receivable of USD 4.2 million from a construction group, due in three months. The client expects a government payment delay and asks for a 12-month extension. The relationship manager proposes a new murabaha: the bank will sell the same goods back at USD 4.5 million, adding USD 300,000 for the extra time, and will also charge a USD 20,000 late-payment penalty. Finance has already booked the USD 300,000 as profit and the penalty as fee income. The file shows the original goods were purchased and delivered 18 months ago, and the client has no evidence of a new underlying trade. A Sharia board member has asked for an urgent review. Credit policy says restructured exposures are classified as watch-list for six months, but the relationship manager wants to avoid that classification to protect his incentive score.
1. Is the proposed new murabaha Sharia-compliant? Explain the conditions that would have to be met and identify any prohibited elements.
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No. The proposal is a murabaha rollover, not a new sale. In murabaha the bank must own and possess the identified goods, then sell them to the customer at cost plus a disclosed profit. Here the goods were bought and delivered 18 months ago and there is no new underlying trade. Selling the same goods back to the bank and then to the client at a higher price merely extends maturity for an extra USD 300,000; that increase is consideration for time, which is riba. The USD 20,000 penalty is also not ordinary income: a late-payment charge may be imposed to encourage timely payment, but it must be donated to charity, not booked as bank income. A compliant route is to grant a genuine extension without any increase, or to restructure into an asset-backed structure such as ijara over a real asset or a musharaka with genuine risk sharing. Any new murabaha would require new goods, bank ownership, possession and a real sale. The Sharia board, not the relationship manager, must approve the restructuring.
2. How should the USD 300,000 and the USD 20,000 be treated in the financial statements? Address recognition, income and impairment.
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The USD 300,000 cannot be recognised as profit. No sale has occurred and no new asset has been delivered; recognising it would misstate income and equity. The original murabaha profit continues to be recognised under the original contract, and the receivable remains at its carrying amount subject to impairment testing. The USD 20,000 penalty should be recorded as a charity payable, not fee income, with disclosure of the policy. Under AAOIFI FAS 30, the bank should compare the carrying amount with the present value of expected cash flows. If the government payment delay makes collection doubtful, recognise an impairment charge and classify the exposure as watch-list or worse under credit policy. The relationship manager’s incentive score should not drive classification. If the USD 300,000 has already been booked, reverse it and correct the ledger before the quarter closes; if material, disclose the correction.
3. What governance and regulatory actions should follow from this file?
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Governance: escalate to the Sharia board and internal audit; suspend the new murabaha variant until approved; review all restructured murabaha files; train relationship managers; and change incentive metrics that reward avoiding watch-list classification. The bank should also review why finance booked prohibited income. Regulatory: assess whether the breach is reportable under the regulator’s Sharia governance rules and notify within the required window if material; cooperate with the Sharia board’s remediation plan. Client handling: explain that the extension can be granted without an increase, and document the revised terms. The board should receive a root-cause report covering product approval, documentation, accounting and compliance monitoring. A public statement is not automatically required, but disclosure in the financial statements may be needed if the amount is material.