Murabaha Commodity Trading

Islamic banks offer different financial assets and procedures like Murabaha, Musharakah, Sukuk (bonds), and more. The total value of Islamic financial assets is more than $2.5 trillion by 2019. Several countries like the UK allow Islamic financial trading. For example, Sukuk is a well-known product on the London Stock Exchange.

Murabaha has a special place in Islamic trading and is compliant with Shariah law. Tthe sale of a commodity for a price includes the cost of the goods plus profit. This amount is mutually undertaken by both the parties involved in the transaction. The seller should reveal the actual cost of the product and the profit percentage added to it before making a transaction with the buyer.

Commodity Murabaha

It is short-term trading where a commodity is sold or purchased for liquidity purposes. It is also known as reverse Murabaha or Tawarruq. The main difference between Murabaha and commodity Murabaha is that the buyer immediately sells the commodity in the same market. Commodity Murabaha is a reasonably common trading procedure in the Islamic financial market. It has been approved by a majority of the global Shariah boards and the AAOIFI Shariah Standards.

Different companies have established Murabaha Trading Platforms to facilitate Islamic financial trading in several parts of the world. The trading platforms adhere to Shariah Law and facilitate banks and individuals to have a seamless transaction on the platform. The certificates generated by the platform are used by banks to finance customers through Murabaha trading.

Let us first see how it works.

Murabaha Commodity Trading

The Murabaha commodity trading has a definite structure that the Islamic Banks across the world follow.

  • When the Islamic Bank receives a request from a customer, it buys a commodity from a broker by paying the purchase price. The ownership of the commodity is now transferred to the bank.
  • The bank then sells this commodity to the customer for a higher price -> cost plus profit (known as Murabaha). The ownership of the commodity is now transferred to the customer from the bank, and debt is created.
  • The customer then asks an agent to dispose of this commodity instead of taking the delivery. The aim here is to immediately sell the commodity for a higher price and get an instant settlement.
  • So who acts as the agent here? The bank itself will act as an agent and sell the commodity to another broker. The money paid by the second broker is remitted to the customer’s account.
  • The customer now has more than enough money to clear his debt with the bank. He proceeds to do the same. The remaining amount is the profit earned by the customer for the entire transaction.

Advantages of Building a Murabaha Trading Platform

Do you know that Malaysia was the leading with assets worth $54 billion belonging to Islamic financial institutions in 2019? Iran was in second place with assets worth $38 billion. The Middle East, naturally, is an active market for Islamic Trading.Developing a Murabaha commodity trading platform will help capture these markets and expand into other countries interested in Islamic trading. By creating a secure blockchain platform (similar to crypto platforms), you streamline Murabaha commodity trading and speed up the process.

The transaction will take place on the blockchain platform, where smart certificates are used for Murabaha commodity trading. In short, the asset/ commodity will be the digital certificate. This increases transparency in the process while ensuring data security.

The process will be similar to trading crypto-backed assets, except that the platform will be Shariah-compliant. This makes e-Murabaha trading perfectly legal and acceptable.

Another advantage of the Murabaha trading platform is that the transaction doesn’t have to be restricted by geographical barriers. Be it Middle East, Asia, Europe, or Africa, people can join the platform and participate in Murabaha trading.

How Murabaha Trading Platform Helps Banks and Customers

The purpose of commodity Murabaha trading is not to buy physical goods or obtain ownership of a commodity. The aim is to buy and sell in less time to make a profit and generate money. That’s the reason the assets are immediately handed over to an agent (the bank) for reselling at a higher price. By moving the transaction to a blockchain platform, banks and customers have the following benefits-

  • Trading secure e-certificates with fixed prices
  • The bank then sells this commodity to the customer for a higher price -> cost plus profit (known as Murabaha). The ownership of the commodity is now transferred to the customer from the bank, and debt is created.
  • Accessibility to the platform from any region (irrespective of the time zones)
  • Easy to create an account, log in, and request for Murabaha trading
  • The transaction completes in minutes instead of days
  • Flexibility to choose other Islamic financial assets for trading on the platform
  • Can complete batch transactions n less time
  • Perform bank-to-bank transactions and bank-to-customer transactions on the same platform
  • Increased transparency that minimizes the risk of fraudulent transactions
  • Data security

To Sum Up

Murabaha commodity trading is an asset-backed short-term financing mechanism famous in the Islamic Banking world. It is usually referred to as Tawarruq in the Middle East and Commodity Murabaha in countries like Malaysia, UK, etc.

Launching a Murabaha trading platform in today’s scenario is a great way to capture various markets at once. You can facilitate trading other Shariah-compliant financial assets on the same platform. Contact WebMob Software Solutions for more information.

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