What is ‘murabahah’?

Murabahah is actually derived from the Arabic word of ‘ribh’, which means profit.

Technically, it is a contract of sale in which the seller is obliged to disclose the cost price of the commodity plus the profit margin he makes on the commodity.

It is also known as cost plus financing. Murabahah contract, same like other Islamic finance contract, becomes binding by offer and acceptance between the two parties who shall have the legal capacity to enter into the murabahah contract.

And also, the subject matter must be owned by the seller in order for the murabahah contract to be valid.

As a whole, murabahah has got two main stages in order to be completed.

In the first stage, the client approaches the bank and requesting for a certain type of commodities and making promise to buy the commodity with a profit margin.

In the second stage, the client purchases the commodity acquired by the bank with a profit margin and agrees on a payment plan with the bank.

Actually, the payment mode of murabahah in the modern Islamic banking industry is usually made by installment.

Murabahah is the most popular mode of financing in the modern Islamic banking industry.

It constitute more than 60% of Islamic finance transactions.

It is commonly and mostly used in the consumer financing, such as buying machineries, equipment, cars, properties and raw materials and so forth.