Commodity Murabaha Booked Out of Sequence
Noor Bank's corporate desk booked a USD 12.0 million commodity murabaha (tawarruq) for a metals trading company on 14 March. The file shows a 10:02 signed purchase order from the customer promising to buy on murabaha, a 10:05 purchase of 4,000 tonnes of aluminium from Broker A, a 10:06 murabaha sale to the customer at cost plus 4.25%, and a 10:07 onward sale by the customer to Broker B at cost. In two earlier deals, the bank's payment to Broker A was released only after the murabaha sale to the customer had been signed. The customer is now 90 days late; the bank has charged a 2% late payment fee and credited it to fee income. The full murabaha profit of USD 510,000 was recognised on day one. The central bank has referred the file to the Shariah Supervisory Board and asked whether the transactions are valid, whether income must be reversed, and what governance failures allowed this to happen.
1. Assess the Shariah validity of the 14 March transaction and of the two earlier deals. What follows if the sequence is defective, and how should the bank remediate?
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A murabaha sale is valid only if the bank owns and possesses (qabd) the commodity before it sells it on. The 10:02 document is a purchase order, a unilateral promise (wa'd), not a sale, and cannot stand in for acquisition. On 14 March the bank bought at 10:05 and sold at 10:06, which is the right order, but the file does not evidence possession; in commodity murabaha possession is normally constructive delivery by the broker to the bank or its agent, and the bank must bear the commodity risk in that interval. In the two earlier deals the order is reversed: the murabaha sale was signed before the bank's purchase was concluded, so the bank sold what it did not own (bay' ma la yamlik). That is invalid, not merely irregular. Consequence: the sale is not effective, the bank is entitled at most to its cost (ras al-mal), and the profit element is unearned; amounts already taken as profit should be returned or, where that is impractical, paid to charity with SSB approval. Remediation: re-execute the affected deals if the customer agrees, block release of any murabaha sale instruction without a matched purchase and possession confirmation, and report the control failure to the SSB and the regulator.
2. How should the 2% late payment fee be treated, and does the analysis change if the customer is genuinely insolvent?
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The 2% fee, USD 240,000, cannot be booked as fee income. The bank may impose a late payment charge as a deterrent (ta'zir), but the underlying obligation is a debt, so anything charged for delay that accrues to the bank is riba. The murabaha standard therefore requires the amount to be donated to charity, and the waiver of the fee must not be used as a bargaining chip to extract a higher price or to extend the facility on new terms. Mechanically: reverse the USD 240,000 out of income, route it to a charity account controlled by the Shariah function, and confirm the customer still owes only the murabaha price. If the customer is genuinely insolvent the position changes. The Qur'anic instruction is to grant time or forgive, and piling a penalty on an insolvent debtor is indefensible. The SSB should require a written policy separating wilful delay from genuine hardship, with evidence standards, and should confirm the charity is not recycled into the bank's own CSR spending.
3. Was it correct to recognise the full USD 510,000 profit on day one? Explain the accounting and Shariah consequences.
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No. Murabaha profit is not a trading margin earned at inception; it is deferred and taken over the financing term on an effective-profit-rate basis, with the receivable carried at cost plus unearned profit. Recognising USD 510,000 on 14 March overstates current income, understates the unearned profit liability, and makes the year's result look stronger than the contract supports. Under IFRS 9 or AAOIFI financial accounting standards the asset is measured at amortised cost and only the time-proportionate profit is released, so a 180-day facility should release roughly half the profit by the 90-day point, subject to any impairment. The Shariah point is more serious: if the sale is invalid for want of ownership, there is no profit at all and the bank's claim is its cost. There is also a knock-on for investment account holders, because profit declared to unrestricted investment accounts must be realised profit; a day-one entry can inflate distributions and create clawback and disclosure problems. The SSB should require a restatement of any distribution made on accelerated profit.