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Lecture 6 Islamic Finance - Coggle Diagram
Lecture 6 Islamic Finance
Murabaha
Definition
Meaning: ribh, meaning profit / gain
definition: the sale of a commodity at the price the seller has purchased it, with the addition of a stated profit known to both the seller and buyer.
Conditions
Knowledge of cost price by buyer
Knowledge of profit margin
Forbidden for 6 RIBAWI goods: Gold, Silver, Wheat / Flour, Dates, Salt and Barley
Validity of Initial contract
Types
Ordinary murabahah sales
Murabahah Based on Order and Promise
Widely used by Islamic Banks
typically involves deferred payment terms
Steps
client and the institution(bank) sign a master agreement
The institution appoints the client as his agent for purchasing the commodity on its behalf and an agreement of agency is signed by both parties. If the institution purchased directly from the supplier (which is preferable), an agency agreement is not needed. The
commodity must remain in the risk of the institution
during the period between the third and fifth stages. (This is the only feature of murabahah which can distinguish it from an interest based transaction.)
The client purchases the commodity on behalf of the institution and takes possession as an agent of the institution.
The client informs the institution that he has purchased the commodity on its behalf and at the same time,
makes an offer to purchase it from the institution
The institution accepts the offer and the sale are concluded whereby the ownership as well as the risk of the commodity is transferred to the client.