The primary Murabaha contract will see a floating rate payer buy a commodity from broker 1, and immediately sell the commodity to the fixed rate payer.
Shari'ah law would traditionally argue that the floating rate payer paying a variable amount would not be Shari'ah-compliant due to the uncertainty of the amount to be paid.
What is important is that the floating rate payer agrees to pay an amount on a fixed day and with reference to a fixed reference, i.
FIXING THE FLOATING RATE What about if the floating rate payer agreed to make a series of payments of fixed amounts and then would add more if the floating equivalent was higher and would receive a refund if the floating payment due on that date was lower?
In brief, the fixed rate payer buys commodities every three months, sells them to the floating rate payer who onward sells them immediately and pays the fixed rate payer the cost of the commodities plus the fixed rate payers profit on the sale, which is linked to a floating rate formula.
Therefore, if one looks closely at this transaction overall, the floating rate payer will pay interest based on LIBOR which is clearly uncertain.
The floating rate payer can make a Wa'ad under a Murabaha to pay the cost of the commodities plus a profit linked to LIBOR and this is Shari'ah compliant.
In substance under the profit swap, all that is essentially happening is that a floating rate payer is paying LIBOR and a fixed rate payer is paying a fixed amount.
6) Strictly speaking, the contract would call for the exchange of the difference between (1 + [pi])H(n) and S(n): the fixed rate payer would pay (1 + [pi])H(n) - S(n) if (1 + [pi])H(n) - S(n) > 0, and the floating rate payer
would pay S(n) - (1 + [pi])H(n) if (1 + [pi]H(n) - S(n) < 0.