​Islamic Contract – Bay’ al-Murābahah: Definition, Legality, Types, and Differences

​Islamic Contract – Bay’ al-Murābahah: Definition, Legality, Types, and Differences

Q1: What is Bay’ al-Murābahah?
Answer:
Literally, the word murābahah is derived from the Arabic root word ribh, meaning profit. Technically, bay’ al-murābahah is a sale contract in which the seller discloses both the acquisition cost and the profit markup to the purchaser. The sale may be conducted either on a cash basis or a deferred payment basis.
The main characteristic of murābahah is transparency, where the seller clearly informs the buyer of:

• the original purchase cost; and
• the amount of profit added.

Q2: What distinguishes murābahah from other forms of sale?
Answer:
Murābahah differs from other sale contracts because it is based on trust and disclosure of cost price. The seller must honestly disclose the actual cost incurred and the profit earned.
Other forms of sale include:

• Musāwamah – the selling price is negotiated without disclosing the original cost price.
• Wadī‘ah – the asset is sold below the original purchase price.
• Tawliyah – the asset is sold exactly at the original cost price without profit.

Q3: What is the legal basis for murābahah in Islamic law?
Answer:
The legality of murābahah is based on the general permissibility of trade in Islam as stated in the Qur’ān:
“Allah has permitted trade and prohibited ribā”
(Qur’ān 2:275)
Its permissibility is also supported by:

• the consensus of Muslim jurists (ijmā‘);
• the Islamic legal principle that all financial transactions are permissible unless proven otherwise; and
• analogy (qiyās) with tawliyah, which was approved by the Prophet Muhammad (SAW).

Although there is no direct Sunnah specifically mentioning murābahah, Muslim jurists generally accept it as a valid Islamic commercial transaction.

Q4: What are the types of murābahah?
Answer:
There are two types of murābahah:
1. Ordinary Murābahah
This occurs when trader purchases goods without any prior request or promise from a customer. The trader later sells the goods to a buyer on a murābahah basis by disclosing the cost and profit.
Case ScenarioA bookstore owner buys books worth RM1,000 for resale. Later, a customer agrees to purchase the books for RM1,200 after being informed of the RM200 profit margin. This is an example of ordinary murābahah.

2. Murābahah to the Purchase Orderer (MPO)
This occurs when a customer requests the seller or Islamic bank to purchase a specific asset on their behalf. The customer promises to buy the asset from the seller at a disclosed markup price, usually through deferred payment.
This type is commonly used by Islamic banks for financing purposes.
Case ScenarioSarah wishes to purchase machinery costing RM50,000 but cannot pay immediately. She requests an Islamic bank to purchase the machinery for her. The bank buys the machinery and later sells it to Sarah for RM58,000 payable over four years. The bank clearly discloses the original cost and profit margin. This is an example of Murābahah to the Purchase Orderer (MPO).

Notes: Differences Between Ordinary Murābahah and Murābahah to the Purchase Orderer (MPO)Ordinary Murābahah

• No prior request from the customer.
• No promise to purchase is made beforehand.
• Seller purchases goods independently for resale.
• Commonly practiced by ordinary traders and merchants.
• May involve cash or deferred payment.
• Mainly used for ordinary trading activities.

Murābahah to the Purchase Orderer (MPO)

• Customer requests the seller or Islamic bank to purchase a specific asset.
• Customer usually gives a promise to purchase the asset.
• Seller purchases the asset only after receiving the customer’s request.
• Commonly practiced by Islamic banks and financial institutions.
• Usually involves deferred payment or instalment financing.
• Mainly used as an Islamic financing instrument.