Murabahah was originally an exchange transaction in which a buyer purchases items from a seller at a specified profit margin payable to the seller. It is assumed that the seller will divulge his costs accurately, such that the profit-margin can be agreed accurately. Hence this type of sale is a form of 'trust sale' since the buyer must trust that the seller is disclosing his true costs. Where a trader acts on behalf of another party in buying goods, the murabahah mark-up may be seen as a payment for the trader's service in locating, transporting and delivering the goods.
The amount of the profit margin in money terms should be specified. The gain made by the seller is not seen as a reward for the use of his money capital, since it is not permissible to rent out money in Islam, but is instead seen as a profit on the sale of goods. However, this kind of sale of goods for money should be distinguished from a transaction in which a bank or financier buys an item and simultaneously sells it on at a profit to a customer. This operation is known as 'murabahah to the purchase-orderer'. To some commentators, murabahah to the purchase-orderer is a controversial technique since it can easily be used as a means of circumventing the prohibition on riba. Here the objective is to rent money, not to trade goods, and as with most modern Islamic finance transactions the objective is achieved by means of a combination of otherwise halal contracts. For example, a bank might buy a property for £100,000 and immediately sell it to a customer for £150,000 payable in installments over ten years. Although both transactions are permissible under Shari`ah when viewed separately, when combined they produce the equivalent of an interest-bearing loan from a bank's perspective.
Murabahah is typically used to facilitate short-term trade transactions and has been adopted in recent times as a financing mechanism under which an Islamic bank replaces the trader of olden times in order to finance an end user's requirements. Murabahah is often referred to as 'cost-plus financing' and frequently appears as a form of trade finance based upon letters of credit.
The majority of financings arranged in the modern Islamic financial market are based upon murabahah. However, it is often not clear to what extent the providers of such finance undertake risk that is substantially different to that undertaken by interest-based banks in the course of their lending. One reason for the controversy that surrounds murabahah as an Islamically acceptable financing mechanism arises from the differentiation between the price for spot payment and the price for deferred payment that is usually in evidence (see What is Usury?). Scholars accept a transaction in which the aggregate value of the deferred instalments equals the spot price (since even if such a transaction is viewed as a combination of a sale of goods with a loan advanced by the seller to the buyer, the loan in this case would be interest-free).
In common with the general rules of exchange transactions in Islam, the subject matter of the murabahah contract must be in existence, under the ownership and in the physical or constructive possession of the seller at the time of contracting.
Where it is practised in the modern financial market, murabahah usually obeys the following terms:
a) the end user settles the amount outstanding in one lump sum upon delivery or thereafter.
b) the settlement date must be specified.
c) the financier maintains ownership of the purchased items until delivery.
d) the financier bears all the costs and risks of ownership until delivery.
e) the end user and financier must pre-agree and specify the mark-up to be applied.
f) the mark-up applies to all relevant costs incurred by the financier.
g) the goods subject to the transaction must be specified.
h) the cost of the required items, and other relevant costs, must be specified prior to contracting.
i) in the event of default by the end user, the financier only has recourse to the items financed, and no further mark-up or penalty may be applied to the sum outstanding, although the seller may alternatively require the buyer to make a pre-specified donation to an agreed charity.
j) the item purchased by the financier cannot be under the ownership of the financier but must instead belong to a third party at the time of contracting.
k) the seller may require the buyer to furnish security for the payment due but only at the time when delivery of the purchased items to the buyer is made.
Bay Bithamin Ajil (BBA)
BBA is the name that is sometimes given (especially in Malaysia) to those forms of bay mu'ajjal (deferred payment sale) in which payment is made in instalments some time after delivery of the underlying goods.