The application of murabaha contract in managing a treasury’s liquidity requirements and/ or investing its short-term surplus funds. It involves the use of commodity-based contracts by selling or buying commodities traded on the London Metal Exchange (LME) on a spot basis with 100% payment of the purchase price, then buying the sold commodities from, or selling the purchased commodities to, a third-party on a murabaha basis (i.e., cost of the commodities plus agreed mark-up) for a deferred payment with a maturity from one week to six months, and with spot delivery of the underlying commodities.
The repayment of principal and profit is usually guaranteed by a creditworthy international bank. Due to different geographical locations and time zones, an Islamic bank may appoint the trade broker as its agent for carrying out the purchase and sale of commodities on its behalf.
This application of murabaha is also known as a secured commodity murabaha.
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