Practical Guide to Murabaha
Understand the most used financing contract in Islamic banking.
Murabaha (cost-plus sale) is the most widespread financing contract within Islamic financial institutions. It often represents over 80% of Islamic bank assets.
What is Murabaha?
In its simplest form, Murabaha is a sale transaction where a bank purchases an asset requested by a client, and then resells it to the client at a higher price containing a mutually agreed-upon profit margin. Payment is usually made in deferred installments over time.
Validity Conditions
For a Murabaha contract to be valid under Sharia, several fundamental conditions must be met:
- Real possession: The bank must first acquire and possess the asset physically or legally before reselling it to the client.
- Cost transparency: The initial purchase cost and the bank's profit margin must be clearly specified and known to the client during signing.
- Risk transfer: The bank assumes the risks related to the asset between the moment of purchase from the supplier and the final resale to the client.