Murabaha is one the most commonly used modes of financing in prevalent Islamic banks and financial institutions. What is murabaha? What are the basic conditions for murabaha? And how it works in Islamic banks? These questions are discussed in some details in this article.

Definition of Murabaha

Murabaha literally means an increase in capital or profit. Technically, it’s a particular kind of sale where the seller discloses the acquisition cost of commodity and markup or profit. The main distinctive feature of this sale is that the seller expressly mentions to purchaser how much cost he has incurred and how much profit he is going to earn in this sale. It’s very clear from this definition that murabaha is not a loan given on interest. But it’s a real sale of commodity / goods for cash or deferred price.

Murabaha is considered as a kind of trust sale. Because, the buyer trusts on seller in his disclosure of acquisition cost and profit. That’s why, if the seller is found guilty of any deception or fraud in disclosure, the buyer has option whether to accept the subject matter or cancel the contract.

Important conditions for murabaha contract

It’s obvious that all the basic conditions for a sale contract applies to murabaha contract. Because, it’s also a type of sale. However, there are some specific conditions which must be fulfilled in murabaha transaction.

Disclosure of cost price and profit

In murabaha transaction, the buyer must know the original price and profit margin of the seller. The seller should disclose to the buyer the cost price of the commodity and profit he wants to get on it. If the buyer doesn’t know the cost price of the commodity and profit earned, the contract is considered voidable (fasid). So, if the original price is disclosed in the same session, then contract become valid. Otherwise, if contracting parties conclude the contract and leave each other without the disclosure of original price, then the contract would be void and batil. In other words, if the original price is unknown, the commodity cannot be sold on the basis of murabaha. It can be sold based on bargain sale or some other types of sale.

The original price should be of fungible things

The original price in murabaha contract must be of fungible thing such as weighable, measurable or approximately countable. In other words, if the original price of good is not something which can be returned in kind such as non-homogeneous property, then this commodity cannot be sold on the basis of murabaha.

Validity of initial contract

It’s necessary that an item which is sold thorough murabaha sale is acquired by lawful contract. If the initial contract is not lawful or invalid, then this item / commodity can’t be sold based on murabaha contract. Because, murabaha is a resale of the commodity with original price plus profit. If the initial sale is irregular and void, then murabaha transaction couldn’t be based on void sale and price.

These are some specific and important conditions for murabaha contract. However, the general conditions for sale must be observed as it’s a form of sale. For instance, the subject matter must be in existence and in the ownership of the seller etc. In the next article, we are going to discuss how murabaha works in Islamic financial institutions and what are the issues in murabaha practices.