Al-Murabaha

Murabaha (cost plus profit sale) is a contract of deferred payment sale of a product at a price which includes a profit margin pre-agreed upon by both parties.

The Bank purchases the desired product from a third party (or supplier) and sells this product to the customer for a pre-agreed price (cost-plus-profit basis). Murabaha is one of the most commonly used models of financing by Islamic financial institutions to fulfill the needs of the customers. It is attractive to the merchants due to its safety as well as many other features such as:

- The profit is known to the buyer and there will be no penalties for late payment;

- A suitable grace period for the first installment can be granted upon the customer request;

- Consultation and technical services are included.

The mechanism of Murabaha contract is very simple: The customer chooses what he desires to buy, the Bank makes the purchase and assumes ownership then sells the product to the customer at pre-agreed upon profit over the cost price. The customer pays for the purchased product in accordance with the pre-agreed contract.

Repayment plans vary according to the nature of the product being financed and the capital life cycle. It ranges between 180 to 360 days for certain products and raw materials and it could reach up to 5 years for fixed assets (property and machinery).


 

 

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