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Determination of Murabaha Mark-up


Murabaha (also spelled murabahah) is a shari’a compatible 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.

The murabaha selling price consists of two components: (1) the acquisition cost (original procurement price) and (2) the mark-up amount (murabaha profit). The mark-up can be determined in the form of a certain amount or a certain percentage of acquisition cost. The two parties have to agree on the mark-up before they enter into the murabaha contract. To that end, the seller and buyer can use a benchmark to determine the mark-up provided that it is specified in the contract. Furthermore, the determination of the mark-up may either be based on an agreed percentage of acquisition cost or a certain amount for a preset and pre-agreed currency. However, the agreed mark-up must neither be subject to price variation nor affected by currency volatility as repayment amount(s) is (are) pre-specified at the mutually agreed currency of denomination.

A benchmark can also be used to determine the mark-up in murabaha transactions (see: benchmark for determining murabaha mark-up).



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