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 a corporate setting, murabaha initiates when an Islamic bank receives an order from its client to purchase an asset (say a vehicle) from a foreign country (say Japan) for a specific amount (say USD 30,000). To finance the client, the bank drafts a murabaha contract in which an agreed mark-up (ribh) of 10% in local currency (say Turkish lira-TRY) is stipulated. On the purchase day, the exchange rate was 18.1 USD/TRY. Suppose on the day of the sale to the purchase orderer (the client), the dollar depreciated to 17.8 TYR (or appreciated to 18.4 TYR). What is the effect of this exchange rate volatility on the murabaha transaction?

In principle, currency volatility has no effect on murabaha transactions, and the murabaha price (thaman) should be paid based on the exchange rate prevailing on the day the Islamic bank purchased the vehicle from the foreign seller. Therefore, the murabaha selling price that the client has to pay whether in a lump sum amount or in installments is:

(1 + 10%) * USD 30,000 * 18.1 = TRY 597,300