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What is Murabaha Bill of Exchange (MBE)-With Practical Examples:
The Murabaha Bill of Exchange (MBE) is a financial instrument used in Islamic finance, particularly in trade and export-import transactions. It combines the concept of Murabaha, an Islamic financing structure where goods are sold at a cost-plus-profit margin, and the Bill of Exchange, a financial document used to guarantee the payment of a specified amount at a future date.
Key Elements of Murabaha Bill of Exchange (MBE):
1.Murabaha Concept:
Murabaha is a Shariah-compliant mode of financing where a bank or financial institution buys goods and resells them to the buyer at an agreed markup.
The transaction must follow Islamic principles, meaning that the bank takes ownership of the goods before selling them and bears any risks associated with ownership.
It’s often used in trade finance, asset purchases, and working capital financing.
2.Bill of Exchange:
A Bill of Exchange is a written, unconditional order by one party (the drawer) directing another party (the drawee) to pay a specified sum of money to a third party (the payee) either on demand or at a predetermined future date.
In the case of MBE, the Bill of Exchange formalizes the terms of payment after the delivery of goods under a Murabaha agreement.
3.Combination of Murabaha and Bill of Exchange:
In the context of MBE, a bank first purchases goods on behalf of a client under the Murabaha structure. The client agrees to repay the bank over a set period, including a profit margin.
To secure payment, a Bill of Exchange is issued. The client promises to pay the bank by a future date, either on a lump-sum basis or in installments, depending on the agreed terms.
4.Compliance with Islamic Law:
Since interest (riba) is prohibited in Islamic finance, the profit margin in Murabaha is pre-agreed and transparent. The MBE ensures that all parties are clear on the terms and timing of payment, following Islamic guidelines.
Steps Involved in MBE:
1.Purchase of Goods: The bank purchases the goods or assets as per the client’s requirement from a seller.
2. Sale to Client: The bank sells these goods to the client under a Murabaha agreement, adding a mutually agreed-upon profit margin.
3. Issuance of Bill of Exchange: The client issues a Bill of Exchange, agreeing to pay the total amount (cost plus profit) on a specified future date.
4. Payment: The client makes the payment according to the terms laid out in the Bill of Exchange.
Advantages of MBE:
Shariah Compliance: It offers a financing structure that complies with Islamic law.
Predictable Costs: The profit margin is agreed upon in advance, making the total cost predictable.
Trade Finance Solution: It facilitates international trade by offering secure payment terms.
Example of MBE Transaction:
Suppose a company in Bangladesh wants to import machinery from a foreign supplier. An Islamic bank agrees to finance the purchase through a Murabaha arrangement:
1. The bank buys the machinery from the supplier.
2. The bank resells the machinery to the company at the cost price plus a profit margin.
3. The company issues a Bill of Exchange, promising to pay the total amount (cost + profit) in 180 days.
4. The company takes possession of the machinery immediately, and the bank receives payment at the maturity of the bill.
In this arrangement, the company can acquire the goods while securing deferred payment terms, and the bank earns a profit without charging interest.
In Finally:
The Murabaha Bill of Exchange (MBE) is an important financial tool in Islamic trade finance, facilitating Shariah-compliant transactions while ensuring security and flexibility in payment terms for businesses involved in cross-border trade.