Murabaha: Definition, Types & Example

Understand

Murabaha is a kind of sale where an Islamic financial institution buys an asset on demand of a customer and resells it to the customer at a cost plus profit basis while allowing the customer to pay in installments.

Types of the Murabaha

In an ordinary Murabaha sale, two parties; a seller and a buyer make a transaction where the seller buys a commodity without a prior promise of purchase (by the purchaser) and resell it to the buyer at cost plus profit basis.

The Murabaha sale connected with a promise occurs when the seller (usually an Islamic bank) does not purchase unless the buyer specifies commodity requirement and make prior promise to purchase the commodity from the Islamic bank.

A Hypothetical Example

Suppose, you want to purchase a car for $1000 but you cannot pay the lump sum amount. For this, you contract an Islamic financial institution, which offers Islamic banking products including the Murabaha. In order to make successful Murabaha transaction, you will make an agreement with the bank to purchase the car, and then the Islamic bank will purchase the car on behave of you and resale it to you at profit of $150 resulting in total cost plus profit amount of $1150. The bank may recover this amount in shape of installments. As you specify your requirement and made the promise to purchase the car, this type of the Murabaha is called ‘the Murabaha sale connected with a promise’.

In case, you neither specify your requirements nor make the promise to purchase the car from the bank then this Murabaha sale transaction will be called ‘an ordinary Murabaha sale’.

Basic Rules and Principles

  • The seller must mention the purchase cost of a commodity and sell it to another by adding profit explicitly.
  • The profit on the Murabaha may be set on mutual consent of both parties.
  • All the expenses including customs duty and freight etc will be added to the cost of a particular commodity however other manufacturing costs including labor cost etc will not be the part of cost.
  • Only a transaction with cost ascertained will be considered as valid Murabaha contract.
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