Tools of Islamic Finance: (3) Murabaha - Kickoffall Info Hub

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Sunday, April 5, 2020

Tools of Islamic Finance: (3) Murabaha

Murabaha which is also know as cost-plus financing, is an Islamic financing structure in which the seller and buyer agree on the markup (profit) or "cost-plus" price for the item(s) being sold.

The word  مرابحة, derived from ribh ( ربح), an Arabic term meaning profit is a term of Islamic jurisprudence  for a sales contract where first-party buy a product for the second party; and first-party sell the product to the second party on a marginal profit; where the second party may repay the amount on a deferred payment method.
Difference between Murabaha and Conventional Finance
The murâbaḥah transaction is different from conventional interest-charging financing in the following ways:
  • The seller/financer in Murabaha must take actual possession of the good before selling it to the customer, and must take responsibility for any defects of the goods; hence, the exchange is goods for money; while in conventional interest charging financing, the financer don’t take the actual possession of the goods; hence the exchange is between money for money.
  • The exchange of the product in Murabaha is on an agreed-upon higher price; instead of interest charges where the percentage of interest may increase based on various factors.

The Process of Murabaha:
  • The customer requests Islamic Bank to buy a product for them
  • The bank Purchase the product from a supplier at one time payment mode
  • The bank sells the product to the customer at a pre agreed on a cost plus profot rate
  • The customer pays the amount on a deferred payment mode (3- 12 months) 

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