Contractual buying and selling at a mark-up profit is called Murabaha. In this case, the client requests the Bank to purchase certain goods for him. The Bank purchases the goods as per specification and requirement of the client. The client receives the goods on deferred payment of the price which includes mark-up profit as per contract. Under this mode of investment the purchase/ cost price and profit are to be disclosed separately. Murabaha is one of the most commonly used modes of financing by Islamic Banks and financial institutions.
- This is a mode of investment is usually used for working capital finance requirement of the client.
- Client may place an order to purchase a good by the Bank and committing to buy the same from the Bank.
- It is a binding upon the Client to purchase the good.
- It is permissible to take cash / collateral security to guarantee the implementation of the promise or to indemnify the damages.
- Stock and availability of the goods is a basic condition. Bank must purchase the goods to acquire ownership.
- After purchase the Bank must bear the risk of goods until delivered.
- Bank must ensure delivery of the specified goods to the Client on specified date and at a specified place
- The price once fixed as per agreement and deferred cannot be further increased.
- Agreed price will include cost price and profit. Bank must disclose the cost price and profit.