Question

Islamic finance Murabaha and Istisna'a

Practice problems Murabaha, Istisna'a Ch 889 Problem 1 Murabaha Mr. Murad is looking to buy a car that costs AED 120,000. He approached 3 Islamic banks and one conventional bank. After discussion with the officer of IB 1 they proposed to him to use a Murabaha contract with the following terms The bank buys the car at 120,000 and charges a flat profit rate of 5% per annum for 5 years to calculate the selling price. Murad will then pay off this selling price via monthly installments for 5 years. 1. Calculate the selling price and the monthly payment 2. Calculate the effective cost of financing He also approached bank IB2 for the same purpose they proposed to use a Murabaha contract whereby the selling price will be paid off in one lump sum after 3 years this selling price this bank charges AED 150,000 3. Calculate the cost of financing in this case Islamic bank 3 uses the CRR and charges a profit rate of 8% to calculate the selling price to be repaid over 5 years via monthly payments. 4. Calculate the monthly payment and the selling price SP3 5. What is cost of financing in this case The conventional bank however proposes that Murad takes a conventional loan for the total cost of the car and pays with fixed annuities (5 fixed annual payments) the first one will be paid in one year. The interest rate is equal to 8%. 6. You are required to provide the amortization schedule for this loan. 7. Which bank should take the financing from?

In a murabaha contract of sale, the client petitions the bank to purchase an item for him/her. ... In a murabaha contract for sale, the bank buys an asset and then sells the asset back to the client with a profit charge.

Answer 1

Case 1:

answer 1)The bank will charge flat fee of 5% for five year,

Fee amount = 120000*5%*5= 30,000.

Cost of car = 120000+30000= 150000.

Monthly installment for car = 150000/ 12*5 = 2500.

answer 2) effective rate of return

Monthly installment (pmt)= 2500

Number of payment (nper) = 5*12=60

Principle (PV) =120000

effective Rate (r)=? using excel function of RATE(nper, pmt, pv)

rate(60,-2500,120000) = 0.763% ( monthly) i.e. 9.154% ( annual).

Case 2:

Answer 3. In lump sum after 3 years , 150,000

using , FV= PV(1+r)ⁿ

=> r = (FV/PV)^1/n -1

=> r = (150000/120000)^1/3 -1 = 0.077217 i.e 7.721%

Case 3:

Answer 4: Profit rate 8% ,

Profit amount = 120000*8%*5= 48,000.

Cost of car = 120000+48000= 168000.

Monthly installment for car = 168000/ (12*5) = 2800.

Answer 5: Cost of financing  

Monthly installment (pmt)= 2800

Number of payment (nper) = 5*12=60

Principle (PV) =120000

effective Rate (r)=? using excel function of RATE(nper, pmt, pv)

rate(60,-2800,120000) = 1.177% ( monthly) i.e. 14.125% ( annual).

Case 4:

Answer 6:

Rate (r) = 8%, number of payment(nper) = 5, Present value (Pv)= 120000.

annual payment by using  pmt(rate,nper,pv) , pmt(8%,5,-120000) = 30,054.77.

Answer 7:

As the cost of loan of case 2,(IB2) is minimum , so he should go with IB2.