Murabaha Signed Before Ownership: Damage, Penalty and the SSB Review
An Islamic bank operating in a dual-banking market approves murabaha financing of PKR 12,400,000 for a textile SME to acquire a stitching line. On 2 March the relationship manager and the customer sign the murabaha sale agreement fixing the price at cost plus 9% profit, payable in 18 equal monthly instalments. The purchase order to the supplier is issued only on 5 March, and the supplier delivers on 20 March. In transit the crate is water-damaged; the customer refuses to accept the machine and stops paying. Separately, the customer had been 40 days late on the first instalment, and the bank charged a 2% late fee, credited it to its profit-and-loss account and reported it as income. The branch manager wants to cancel the contract, refund nothing and sue for the full price. The Shariah Supervisory Board has asked for a compliance review before any legal action is filed.
1. Identify the Shariah defects in the transaction sequence and explain who bears the risk of the damaged machine.
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Three defects follow from the sequence of events.
- Sale before ownership. In murabaha the bank must own and possess the asset before it sells it to the customer. Here the sale agreement was signed on 2 March, but the purchase order was issued only on 5 March. The bank sold what it did not yet own; the murabaha sale is not validly concluded and the profit element is not earned.
- Risk bearing. Ownership carries risk. The goods were damaged in transit at a time when, on the documents, the bank was the owner. The loss therefore falls on the bank, not on the customer, and the customer cannot be compelled to accept damaged goods or to pay a price for them.
- Character of the receivable. Because no valid murabaha sale occurred, the amount claimed cannot be treated as a murabaha receivable. At most the bank may recover documented actual cost if a fresh, properly sequenced sale is later concluded.
Reasoning: murabaha is a trust sale with disclosed cost and disclosed profit. Ownership and possession are substantive preconditions, not paperwork, because they are what legitimise the profit.
2. Assess the treatment of the 2% late payment charge and state the correction required.
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A late payment charge in murabaha may be imposed as a deterrent, but it must be donated to charity; it may not be taken into the bank's income and may not be used as compensation for the time value of money. Two errors are present.
- Income recognition error. Crediting the charge to profit and loss converts a charitable penalty into income resembling riba. It should be reversed out of income, and the amount paid to charity with evidence retained.
- Disclosure error. The financial statements misstate income; a correction and disclosure are needed.
Controls: amend the contract template so the clause states the charity destination; configure the system to route the charge to a charity account automatically; require Shariah audit sampling of penalty accounts.
On the customer's delay itself, the bank should first consider genuine hardship. The Qur'anic instruction to grant respite to a distressed debtor should be applied before any penalty is enforced, and rescheduling is preferable where the delay is not wilful.
3. Recommend a resolution and the control changes needed to prevent recurrence.
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Recommended resolution:
- Do not sue for the full murabaha price. The sale was defective and the goods were damaged while the bank owned them.
- Reject or return the goods to the supplier and pursue the supplier and the transit insurer for the damage.
- If the customer still wants the machine, execute a fresh murabaha: the bank purchases, takes delivery through a goods-received note, bears risk, then sells at a renegotiated price. Amounts already paid are credited to the new contract or refunded.
- Refund any late fee already booked and pay the equivalent to charity.
Control changes:
- Separate signing authority so no murabaha sale can be executed without a goods-received note.
- A system block preventing sale booking before purchase booking.
- Automatic charity routing for penalties.
- Relationship-manager training on contract sequencing, with the case used as a worked example.
- Shariah audit review of the file and quarterly sampling of murabaha files by the SSB secretariat.