What Is Murabahah (Cost-Plus Financing)?

Dr. Monzer Kahf, a prominent Muslim economist and counselor states: “Murabahah is a sale contract that is based on full disclosure of cost and profit on the part of a seller. It can be practiced on an order of a purchaser as “buy this item and I will buy it from you at cost plus 10%.” It is then murabahah to the purchase orderer. This transaction is heavily used in Islamic banks as a financing contract.
You know that financing (for profit) in Shari`ah is permissible provided it runs through real commodities. The vehicles of financing are either sale, lease, or equity partnership. Murabahah is a sale-based financing. The transaction consists of two consecutive sale contracts with a previously given order to buy and a promise to buy from the first purchaser. On order the Islamic bank buys an item say for 100 paid cash; after taking physical possession, the bank sells the item to the purchase orderer for deferred payment at cost plus increment. If the promise takes the form of a contract executed before the item is purchased and possessed by the bank, the murabahah is invalid and becomes riba. It is similar to riba in that both produce fixed return known in advance. The promise in murabahah may not materialize; it becomes contractually known when the second sale contract is signed. It is dissimilar to riba in that murabahah is a sale that passes through a commodity, actual possession and ownership with all legal implications of ownership, while interest lending is merely a loan contract that does not necessarily have a commodity.
Murabahah cannot be used to reschedule previously existing debts nor for interest bank deals with already existing debts. There are legal, financial and economic implications of these differences that are more sophisticated, and you can find them in professional research. You may see my article in the Thunderbird International Management Journal, 1999 and others.”