Murabaha (also spelled murabahah) is a shari’a permissible mode of debt financing which involves the sale of a commodity mostly for a deferred price. The two parties to the contract are: a financier (usually an Islamic bank) and a client.

In its business form, murabaha is initiated when a potential buyer orders a commodity to pay for it with a specified mark-up (profit or ribh). The seller accepts and accordingly procures the commodity. Once the commodity is legally possessed by the seller, the buyer is asked to purchase it and takes delivery. As such, the commodity must exist at the time of contract, and must be owned by the seller at that time whether via constructive (qabd hukmi) or physical possession (qabd fe’eli). Furthermore, quality and quantity must be defined in clear-cut terms, and the exact date and method of delivery must also be specified.

Any discount (khasm or hasm) on the cost of acquisition that the Islamic bank (in its capacity as the seller in murabaha) shall be reflected as a reduction in the acquisition price, and consequently in the reselling price (murabaha price). For example, suppose a supplier offers a 15% trade discount to its clients for any purchase worth 10,000 dinars and more. The Islamic bank, in view of the promise (wa’ad) by the purchase order, acquires an asset worth 11,000 dinars from the supplier. Thereafter, the client, (the purchase orderer), buys the asset from the bank at 11,000 dinars plus a mark-up of 18% on the basis of murabaha. Although there is no contractual relationship between the supplier and the purchase orderer, murabaha principles dictate that the latter should take advantage of this discount. Without the discount, the murabaha selling price payable by the client would be:

Murabaha price = (1 + mark-up%) * acquisition price

Murabaha price = (1 + 18%) * 11,000 = 12,980 dinars

However, with the 15% discount, the murabaha price payable by the client becomes:

Discount-adjusted murabaha price = (1 + mark-up%) * acquisition price * (1 – discount%)

Discount-adjusted murabaha price = (1 + 18%) * 11,000 * (1 – 15%) = 11,033 dinars