MUSAWAMAH can be defined as a sales contract with deferred delivery of the goods. Thus, unlike Modaraba, the Bank does not intervene as a seller on credit of the goods acquired on command of its relationship, but as a purchaser, with cash payment of a commodity that will be delivered to it by its partner.
The rules of the Shari a prohibits in principle any commercial transaction whose object is non-existent at the time of its conclusion. However, some commercial practices, although not meeting this requirement, are tolerated given their necessity in people’s lives. This is the case of the sale MUSAWAMAH which was authorized by the Prophet in the Hadith “the one who makes the MUSAWAMAH, that he do it for a known volume, for a known weight and for a known time.
Practical Terms and Conditions for Musawamah
- The Bank (purchaser) places an order with its customer for a given quantity of goods, a value corresponding to its financing need.
- The customer (seller) sends to the Bank a proforma invoice indicating the nature, the quantities and the price of the goods ordered.
- Both parties agree to the terms of the transaction and sign a MUSAWAMAH contract with agreed terms (nature of goods, quantities, prices, terms and conditions of delivery and / or sale on behalf of the Bank etc …).
- At the same time, both parties sign a proxy sale agreement whereby the Bank authorizes the seller to deliver or sell (as the case may be) the goods to a third party. The seller undertakes, under his / her full responsibility, to collect and remit the amount of the sale to the Bank.
- In addition to the ordinary guarantees required by the Bank in its financing activities (bonds, pledges, mortgages, etc.), it may require the seller to take out credit insurance to guard against the risk of non-payment of final purchasers, Insurance for subrogated goods to the benefit of the Bank.
- Upon maturity, in the event that the Bank elects to mandate the seller to sell the goods on its behalf, the latter shall invoice them on behalf of the Bank and deliver the quantities sold, taking care, if the Bank deems it necessary, To require buyers to have the removal bills targeted at the counter’s counters (a measure designed to enable the monitoring and control of the operation).
- The remuneration of the seller’s mandate may be granted in the form of a commission, a drawback or an interest in the margin generated by the sale of the goods. It can also be deducted at the beginning of the transaction and integrated into the amount of the advance (financing MUSAWAMAH). In any event, its amount must be calculated by reference to the margin rates applied in the market for similar transactions.
- The Bank may utilize the warping technique by requiring the storage of goods in a general store in the contractual terms of sale and selling it, either itself or through its customer, by endorsing the warant and Receipt as a guarantee of payment.
- The selling price of the goods by the seller on behalf of the Bank shall be at least equal to the minimum annual rate of return as set out in its financing policy, after a deduction of commissions and other charges.
Benefits of Musawamah Method of Financing
While Musharaka, Modaraba, Leasing and Modaraba allow Islamic Bank to respond to a large extent to the needs of its clientele in terms of financing the cycles of creation, investment and exploitation of companies, these different techniques are insufficient on their own to cover all these needs.
This applies, for example, to the financing requirements of the Working Capital Fund, certain operating costs such as wages, taxes and duties, customs duties, etc.
These needs, which often require a direct monetary contribution, therefore require a more appropriate form of financing than the Murabaha, Which must be compulsory for reasons of compliance with Shari a principles, through the purchase of stocks and their resale by the Bank itself.
MUSAWAMAH has the advantage of allowing the Bank to advance funds directly to its client, positioning itself as buyer vis-à-vis him and granting him a time limit for the delivery of the purchased goods. Moreover, the mandate formula, as will be discussed below, allows the client to continue to deal with its ordinary clientele on the sole condition that it does on behalf of the Bank, up to the value of Goods acquired by it under the MUSAWAMAH contract.
Compared to Musharaka, which adapts more to the long cycle, MUSAWAMAH is characterized by its least risk insofar as the debt of the Bank (or its counter value) constitutes, as in Modaraba, a constant commercial debt on the customer (the seller).
It appears, therefore, that this type of financing offers greater opportunities and greater flexibility to the Bank’s intervention, while remaining within the framework of the principles of Islamic Shariah.
As such, MUSAWAMAH presents itself as an ideal means of financing certain types of economic activities such as Agriculture, Handicraft, Import-Export, Youth Cooperatives, and PMI – SMEs in addition to the sector of distribution.
In addition, MUSAWAMAH could be a substitute for the practice of commercial discounting. The effects and / or securities in the client’s possession will be taken as a guarantee of the MUSAWAMAH financing that the Bank may agree to.
Analyzed by comparison with traditional banking practices, MUSAWAMAH can substitute for short-term credits such as cash facilities, overdrafts, campaign credits and commodity advances. CONDITIONS OF
Conformity of the Musawamah to the principles of Shari a
- The goods covered by the contract must be known (in kind and quality), quantities (in number, volume or weight) and valued (in currency or other counter party in the case of barter).
- The period of delivery of the goods by the seller must be fixed in the contract and known by both parties.
- The price (or consideration) of the goods shall be fixed in the contract known to both parties and paid by the buyer (Bank) in cash.
- The place of delivery must be determined and known to both parties.
- The buyer may demand from the seller a bond to guarantee the delivery of the goods at maturity or any other real or personal guarantee.
- The buyer may mandate the seller to sell and / or deliver the goods at maturity to a third party for a commission or commission. The seller is then personally liable to the buyer for the recovery of the sale price.
- The buyer cannot sell the merchandise before its delivery by the seller. However, it is allowed to do so through a parallel MUSAWAMAH contract.