This is the most common product in Shariah compliant trade finance. With murabahah products, buyers ask banks to import certain goods. The banks do this and then sell the goods to the buyers for a profit. In murabahah contracts, the bank typically uses its own capital to finance the letter of credit for such financing arrangements. In murabahah working capital products, firms are provided with working capital on a similar cost plus-profit basis.
MURABAHAH CONTRACT DETAILS
The term Murabahah is derived from the word al-ribh, which means an increase in capital. Murabahah is cost-plus financing and a sale transaction where the seller discloses the cost of the commodity and amount of profit charged. It should be noted that Murabahah is a sale transaction and not a loan that is given on Interest, which is considered riba (or excess). In a Murabahah agreement, the customer, who isn’t financially able to make such a purchase approaches the bank and signed a promise to purchase and request the bank to make a purchase of the certain identified asset which the customer has mentioned to the bank.
CUSTOMER APPROACH THE BANK
The customers approach the bank to purchase a commodity or an asset
BANK APPOINTS AGENT
The bank appoints the customer as an agent to purchase the asset on its behalf. At this point, the bank will also disclose the price plus profit to the customer. The bank will have the ownership and risk of an asset at that time.
The bank will sell the same commodity to the customer on an agreed profit which will be paid in the future.
OWNERSHIP IS TRANSFERRED
The bank will transfer the ownership and risk to the customer upon close of the sale.
HOW MURABAHAH CONTRACT CAN HELP YOU
KEY BENEFITS OF A MURABAHAH CONTRACT
Purchasing raw materials, inventory, equipment, machinery, inventory by business organizations etc.
Asset financing, Import and Export Financing, Consumer goods financing, House Financing, Murabahah is used in various types of financing
No penalty can be charged in case of late payment.
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