Islamic Finance
Murabaha


Murabaha
is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit or mark-up thereon.

The profit in Murabaha can be determined by mutual consent, either in lump sum or through an agreed ration of profit to be charged over the costs.

All the expenses incurred by the seller in acquiring the commodity like freight, custom duty etc. shall be included in the cost price and the mark-up can be applied on the aggregate cost. However, recurring expenses of the business like salaries of the staff, the rent of the premises, etc. cannot be included in the cost of an individual transaction. In fact, the profit claimed over the cost takes care of these expenses.

Murabaha is valid only where the exact cost of a commodity can be ascertained. If the exact cost cannot be ascertained, the commodity cannot be sold on murabaha basis. In this case the commodity must be sold on Muswamah (bargaining) basis i.e. without any reference to the cost or to the ratio of profit / mark-up. The price of the commodity in such cases shall be determined in lump sum by mutual consent.