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). 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.

In simple terms, murabaha (المرابحة) is the sale of goods at cost plus an agreed profit (mark-up). The key characteristics of this type of sale (ba’i or bay’) are:

• Price (thaman) is known to the purchaser (the seller is shari’a bound to reveal the actual price).
• Defects, if any, must be disclosed to the purchaser.
• Contract must be free of riba (usury).
• Contract may include other terms of purchase (such as attachment of wa’ad/ promise, appointment of the purchaser as wakeel/ agent in taking delivery, etc).