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Definition

Murabahah is the sale of a commodity for the price at which the seller has purchased it, with the addition of a stated profit known to the buyer. The only features distinguish it from other kind of sale is that the seller expressly tells the purchaser how much cost he has incurred and how much profit he is going to charge in addition to the cost. If a person sells a commodity without reference to the cost, this is not murabahah.

Murabahah

  • Islamic financial principles are premised on the principle of providing for the welfare of the population by prohibiting practices considered unfair or exploitative.
  • The Islamic financial system strictly prohibits giving or receiving of any fixed or predetermined rate of return on financial transactions-interest.

    • Features of Murabahah

  • Several contracts are completed in steps.
  • The sequence of their execution is key to making the transactions shariah compliant.
  • The mark-up (profit) may be an absolute amount or a percentage of the cost price.
  • Since it is a ‘sale’ the contract price (cost + profit) cannot be varied during the tenure of the facility.
  • Even if the customer repays the facility at any time before agreed tenure the bank is contractually entitled to full outstanding amount but may choose Rebate which is at the discretion of the bank. It is not contractual.

    • If the facility is restructured, say extension of repayment period, the bank cannot charge additional profit for the extended period.

    Steps in Murabahah

  • Having identified the asset.
  • The customer approaches the Bank and gives a unilateral undertaking to purchase the Asset.
  • If the customer qualifies, the Bank and customer enter a Murabahah financing agreement (Execution of Master Murabahah Agreement).
  • The bank appoints the customer as its agent to buy the assets/goods from the supplier (Agency agreement is executed).
  • Goods are purchased by the Bank via its agent (client) and liability is assumed by the bank.
  • The bank accepts the customer’s offer.
  • Client purchases the goods from the bank and repays the contract price (cost + mark-up) according to the agreed repayment terms.

    • NB: A reminder that funds for financing under Murabahah contract should not be accessed by the customers but remitted directly to the vendors/beneficiaries as per proforma invoice provided at application stage.