Murabaha is one of the most popular Islamic finance structure that is widely used by Islamic banks for financing the sale/purchase of goods and commodities.
It is based on the concept of cost plus profit. Under this structure the buyer agrees to buy a commodity on a cost plus profit basis. The basic premise is that the seller discloses the actual cost of the commodity and then adds a profit which could be a lump sum or a percentage.
This amount of cost plus profit can be paid on spot or on deferred basis. A sale on deferred payment basis is called ‘ Bai Muajjal.‘
So as per Islamic sharia, murabaha contract is basically a contract of sale, with a difference that the cost and the profit is disclosed by the seller. If the seller does not disclose the cost this transaction will not be called as murabaha, even though he may be earning profits on the sale. Such a sale will be known as Musawamah.
Some basic rules of murabaha sales
- The commodity/goods for sale should not be something which is haram like pork, arms, alcohol, etc.
- The commodity/goods for sale must in existence at the time of sale.
- The commodity/goods for sale must be owned by the seller at the time of sale.
- The commodity/goods for the sale must be in the physical or constructive possession of the seller.
- The sale contract under Murabaha must be unconditional, under such a condition is part of normal practice of such trades. For eg. warranty for goods.
As per the Islamic sharia , Murabaha is not a mode of financing but a type of sale , as such its use by Islamic Banks should be restricted to transactions that specifically require sale and purchase of commodity.
The use of murabaha as a financing mode should restrcited and subject to below conditions.