Islamic Finance | Tutorials
Types of Murabaha to The Purchase Orderer (MPO)
A murabaha to the purchase orderer (MPO) is a form of murabaha in which the potential buyer (purchaser orderer) instructs the seller (usually an Islamic bank, a financier) to purchase a given asset/commodity according to pre-defined specifications. The two parties negotiate the transaction in terms of specifications, price, delivery conditions, repayment, etc. The orderer promises the purchaser to buy the asset/commodity at a specific mark-up after the purchaser legally possesses it. However, the purchaser orderer may or may not be under obligation to conclude the sale as the promise of the purchase orderer to the purchaser may or may not be binding. In principle, murabaha contract cannot be based on a stipulation making the orderer bound to fulfill his promise. Classic shari’a scholars are of the opinion that the orderer has the option either to purchase the asset or commodity or opt out without purchasing when the purchaser offers it to him. However, some present-day shari’a scholars have allowed the promise attached to murabaha to the purchase orderer to be binding on the purchaser orderer. Essentially, a binding promise takes into account the practical considerations in the works of Islamic banks.
- MPO with a binding promise: If the purchaser (who was instructed to purchase an object) accepts the request of the instructing orderer, the contract of sale would be concluded after the object of sales becomes in the instructed purchaser’s possession. This sale, from a shari’a standpoint, is considered to be in fulfillment of the binding mutual promise between the two parties. When the purchaser offers the object to the orderer, the latter should accept it based on the binding mutual promise. As such, the contract of sale is formally established. It is permissible in this form of sale that the ordered purchaser receives a security deposit known as hamish al-jiddiyyah to make sure that the orderer is serious in his order to purchase the object. In the event that the orderer refuses to buy the object, the actual damage incurred by the purchaser should be reimbursed from hamish al-jiddiyyah. If hamish al-jiddiyyah falls short of the actual amount of damage, the purchaser may have recourse to the order for the amount of shortage.
- MPO with a non-binding promise: The purchaser orderer instructs the purchaser to procure an object, and promises that when that object is purchased, the orderer will purchase it from him at a specified price including an agreed mark-up (profit or ribh in Arabic). This instruction or request constitutes a willingness to purchase, and therefore it is no an offer, per se. It follows that if the purchaser accepts this request, he first procures the object by paying its price to the vendor (which is, of course, lower than the resale price), and having it in his possession. After taking legal possession of the object, the purchaser offers it to the orderer according to the terms of the mutual promise. At this stage, the orderer would have the option to conclude a contract of sale on this object or to decline the purchase altogether. This is so because the orderer is not obliged to fulfill his promise. If the orderer chooses to proceed with concluding the contract, the offer (ijab) is said to be met with the acceptance (qabool), and the contract becomes a valid sale. Otherwise, the purchaser will keep the object in his possession and can dispose of it as he deems appropriate.
- Debts under Murabaha to the Purchase Orderer
- Procrastination by a Solvent Murabaha Debtor
- Price Discount in Murabaha