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. The fixed rate payer will immediately sell the commodity to broker 2 to generate cash.
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.
The amount of the fixed rate payer's profit is uncertain as it is linked to LIBOR.
There is, however, the uncertainty of the profit paid to the fixed rate payer. In Yankson's view this uncertainty is exactly the same as that contained in an interest rate swap contract and therefore, there is a case for arguing that those contracts should not fail for lack of Gharar.
This is due to the fact that no sooner has the fixed rate payer bought the asset, it is sold to the floating rate payer and onto the floating rate payer's agents.
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.
Floating rate payments by the dealer will ideally offset the issuer's variable-rate debt exposure such that the issuer is, as a consequence of the debt issuance taken together with the swap, a net fixed rate payer
. As noted later in this piece, a basis risk is involved, as the variable swap rate received is structured to be close to the variable-rate interest payment made.