MURABAHA MARK UP SALE : Marifa Academy Islamic Finance

The word Murabaha is derived from the word ‘Ribh’, denoting profit or gain. Murabaha is selling a commodity as per the purchasing price with a defined and agreed profit markup. This markup may be a percentage of the selling price or a lump sum. This transaction may be concluded either without a prior promise to buy, an ordinary Murabaha, or with a prior promise to buy, submitted by the person interested in acquiring goods through the institution i.e. Murabaha to purchase orderer (the customer). This transaction is one of the trust based contracts as the seller explicitly discloses the purchasing price and profit margin to the buyer.

The legitimacy and permissibility of the Murabaha sale is derived from the verses of the Quran in which Allah, Most High, says, “That is because they say: “Trading is only like Riba (usury),” whereas Allah has permitted trading and forbidden Riba (usury)”.

Important principles of a Murabaha

Procedures prior to the contract: It is necessary that the purchaser should express their wish to acquire an item through the seller prior to the contract. But the expression of the customer does not constitute a promise or commitment except when it has been expressed in due form. The seller can purchase the items on its own behalf but only in response to its customer’s wish and application. The promise to buy is not the integral part of a Murabaha transaction, but is intended to provide assurance unilaterally by the purchaser (customer). A bilateral promise is not permissible except if there is an option to cancel the promise, which may be exercised either by both promisors or by either one of them. The seller, in case of a binding promise, can take a sum of money as security deposit (Hamish Jiddiyyah). In case of the customer’s breach of its binding promise, the seller is entitled only to an amount equal to the actual loss from the security deposit (Hamish Jiddiyyah).

Contracting parties: The parties who are involved in a Murabaha contract are the seller as the financier and the buyer as the customer

Subject matter: The subject matter of a Murabaha contract involves the asset and the selling price. The asset shall be clearly defined including its type, quantity and other descriptions and must be permissible from Shariah perspective. The seller must assume the risk of the ownership in the asset it intends to sell. Hence, it has to acquire the physical or constructive possession of the asset before entering into the Murabaha Sale Contract with the purchaser. Receipt of Bill of Lading by the seller or its agent, when purchasing goods on the international market, is considered as constructive possession. The selling price of Murabaha asset including its cost and profit margin must be disclosed to the purchaser clearly. The selling price and the seller’s profit are required to be fixed and known at the time of signing the contract. Payment of the price of the item can either be short term or long term installments. The seller cannot receive any commitment fee or a fee for providing the credit period from the purchase.

Conclusion of a Murabaha: The contract of Murabaha consists of the offer by one party and the acceptance by another party. The Murabaha contract can be concluded by means of meeting or exchanging the offer and acceptance in any customary form of modern communication. It cannot be concluded automatically or by force, if the purchaser refuses to conclude the Murabaha. The forms of taking delivery or possession of items differ according to their nature and different trade customs. In case of the purchaser’s breach of contract, the seller is entitled to receive compensation for actual damage it has incurred as a result of the breach.

Guarantees and treatments: The seller may ask the purchaser to provide lawful security like a pledge or third party guarantee or cheques or promissory notes, etc., against failure of purchaser in instalment payments. However, it cannot be stipulated that the ownership of the item will not be transferred to the purchaser until full payment of the selling price. The seller may on its absolute discretion give up a part of the selling price if the purchaser pays early, but the date for payment cannot be extended in exchange for an additional charge or payment.