Murabahah, more accurately transliterated as (Murābahah) is a particular kind of sale, compliant with Shari'a, where the seller expressively mentions the cost he has incurred on the commodities for sale and sells it to another person by adding some profit or mark-up which is known to the buyer. As the requirement includes an "honest declaration of cost", Murabahah is one of three types of bayu-al-amanah (fiduciary sale). The idea of murabaha rose for two purposes:
1) A request for finance
The customer requests the bank to buy him/her a certain asset and promises to pay the asset cost for the bank plus a profit mark-up considering that the bank will sell the asset with all or part of the price deferred. It is noteworthy however that postponement is not a condition for a Murabahah sale, although it is considered to be a common practice.
2) A pursuit of experience
Taking advantage of the purchaser's experience in the field, a party to the Murabaha contract may ask the other party to purchase a certain asset with a promise to pay back the initial cost plus an agreed upon profit margin. There is a need for this as some people do not know the value of certain commodities therefore they seek the assistance of an experienced persons.
Murabahah to purchase for the Ordering Party
It is the prevailing practice in
Murabahah to purchase for the Ordering Party is a sale negotiated between two parties or more, who promise each other to execute an agreement whereby the Ordering Party requests the Ordered Party to purchase and acquire an asset, with a promise from the Ordering Party to repurchase the said asset from the Ordered Party at a price including a profit through a subsequent sale agreement.
Steps of Murabaha to purchase for the Ordering Party
1. The ordering party submits an application to the bank giving detailed description of the desired asset.
2. The bank reviews the application and having insured its economic feasibility, sets the conditions and guarantees for approval.
3. The bank purchases the described asset from the supplier/vendor.
4. The bank acquires possession of the purchased asset (physical or constructive possession).
5. When the bank takes possession of the purchased asset, it is shown to the ordering party who has the choice to accept or reject it.
6. In case the ordering party accepted the purchased asset, a Murabaha contract, including the agreed condition, is prepared and signed off by the parties to the contract (the bank & the ordering party) and their witnesses.
7. Execute the required guarantees from the ordering party.
8. Deliver the purchased asset to the ordering party with an acknowledgment of receipt.
Area of application
Murabaha helps enterprises and commercial customers by serving their project and business needs. It is the Islamic finance mode commonly used by Islamic banks. It could be used to partially finance customers' industrial or commercial activities and enables them to procure ready made commodities, raw materials, machineries and equipments from inside the country or outside (import).