Murabaha (also spelled murabahah) is a shari’a compatible mode of debt financing which involves the sale of a commodity mostly for a deferred price. The two parties to the contract are: a financier (usually an Islamic bank) and a client.
In its business form, murabaha is initiated when a potential buyer orders a commodity to pay for it with a specified mark-up (profit). The seller accepts and accordingly procures the commodity. Once the commodity is legally possessed by the seller, the buyer is asked to purchase it and takes delivery. As such, the commodity must exist at the time of contract, and must be owned by the seller at that time whether via constructive (qabd hukmi) or physical possession (qabd fe’eli). Furthermore, quality and quantity must be defined in clear-cut terms, and the exact date and method of delivery must also be specified.
Discount (khasm) in cases of premature payment of murabaha price (thaman al-murabaha) comes in two different forms:
- Non-contractual discount on premature payment: the seller may waive, at the time of prepayment or early settlement, part of the outstanding payment (unpaid balance of the murabaha price) in the form of a discount to the purchase orderer for settlement before the maturity date. For example, an Islamic bank may consider waiving part of the outstanding amount of murabaha repayment, whether as a lump sum or a specific percentage, when the murabaha buyer settles the outstanding amount before the end of the murabaha contract.
- Contractual discount on premature payment: both the seller and the purchase orderer may stipulate a pre-agreed price clause in the contract for such a discount or rebate in the case of early settlement. This discount may be in the form of a lump sum or a given percentage.
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