Murabaha

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Murabaha (accurate transliteration murābaḥa, Arabic مرابحة) is defined as a particular kind of sale, compliant with shariah, where the seller expressly mentions the cost he has incurred on the commodities to be sold and sells it to another person by adding some profit or mark-up thereon which is known to the buyer. As the requirement includes an 'honest declaration of cost', murabaha is one of three types of bayu-al-amanah ('fiduciary' sale)[Other two types of bayu-al-amanah are Tawliyah (sale at cost) and Wadiah (sale at specified loss)].

It is one of the most popular modes used by banks in Islamic countries to promote riba-free transactions. The ratio in which this instrument is being used varies from bank to bank. Typically Murabaha is used in asset financing, Property, Micro Finance as well as in import / export of commodities. [1]

Use of the instrument of Murabaha is however restricted only to those cases where Mudarabah and Musharakah are not practicable. In reality there are risks associated with profit sharing, and banks are not guaranteed any income from these modes of financing. As a result, Murabaha with its fixed margin attached, offers lenders (ie the banks) with a more predictable income stream.

There are, however practical guidelines in place which aim to ensure that the transaction between the bank and the customer is one based on trade and not merely a financing transaction. For instance, it is a requirement that the bank takes constructive or actual possession of the good before selling to the customer. Whilst it can be justified to charge an additional margin to the customer to reflect the time value of money in terms of actual payment not being received from the customer at time zero, any penalties for late payments can only be imposed if the bank agrees to purify this by donating this to charity.

The accounting treatment of Murabaha and its disclosure and presentation in the financial statements also varies from bank to bank.