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The Principles and Practices of Shariah in Islamic Finance - page 15 / 49

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Murabahah is a sale of an asset at cost plus a known mark-up

8. Murabahah comes from the word ribh which means increase. Technically, Murabahah is the mark-up disclosed to the purchaser as per the seller’s purchase price for a trust-sale of a certain specified asset, excluding monetary assets such as cash and receivables. Murabahah sale may be contracted on cash or credit basis.

9. In the Islamic financial services industry, Murabahah is adopted in a transaction known as Murabahah to the Purchase Orderer (MPO) whereby three parties are involved, namely the IFI, the supplier and the purchase orderer. The Murabahah credit sale of a specified asset by an IFI to the purchase orderer is at a disclosed mark-up price based on the IFI’s cost of financing the purchase.

Murabahah to Purchase Orderer for asset-financing and not cash financing purposes

10. For the purpose of this parameter, the technical definition of Murabahah is Murabahah to the Purchase Orderer. This Murabahah parameter is meant for the purpose of financing acquisition of assets. As such, Bai’ `nah and Tawarruq are not within the scope of this parameter.

Section 3: Definition

Illustration 1: Murabahah Financing

A purchase orderer applies to an IFI for car financing under a Murabahah sale contract. The IFI does not have the car but will, upon the promise of the purchase orderer to purchase the car on a mark-up basis, purchase the car from a third party, i.e. the supplier. The IFI purchases the car from the supplier, then, sells it to the purchase orderer on a deferred payment basis. The difference between the purchase price paid by the IFI to the supplier and the sale price that the IFI is selling to the purchase orderer is a mark-up for the IFI. For example, the financier purchases the car from the supplier at RM100,000 and sells on credit to the purchase orderer at RM120,000 payable in 5 years. While the supplier earns trading profit, the financier earns the financing profit through a mark-up sale.

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