Murabahah is a fundamental concept in Islamic finance, serving as a form of cost-plus-profit sale. It is a method that allows for the financing of goods and services while adhering to Shariah law, which prohibits interest-based transactions (Riba).

Here's a summary of the key points for reference:

Definition: Murabahah is a sales contract where the seller (usually a financial institution) informs the buyer about the cost of the goods and the additional profit margin. It is a deferred payment sale where the buyer agrees to pay the cost plus the profit at a later date.

Key Principles:

1. The item being sold must exist at the time of the sale.

2. The financier must own the commodity before selling it.

3. The commodity must be in the possession of the financier, even if briefly.

4. The sale must be immediate and unconditional.

5. The asset must be legitimate property (Halal) and valid.

6. The asset must be clearly identified to the buyer.

7. The delivery must be certain and not subject to chance.

Profit Principles:

o The price, including the profit, must be agreed upon and fixed at the beginning of the transaction.

o The profit can be determined by mutual consent and can be a fixed amount or a percentage of the cost.

o All expenses related to acquiring the commodity are included in the cost price, but not the general business expenses.

Mechanics of a Murabaha Transaction:

o The customer identifies a need for certain goods and agrees to purchase them from the Islamic bank if the bank acquires them.

o The bank purchases the goods and then sells them to the customer with a profit markup.

o The customer pays for the goods over an agreed-upon period, typically in installments.

Applications in Islamic Finance:

o Murabahah is used for various financial products, such as home and vehicle financing, working capital and project financing, and goods and trade financing.

o It can also be the basis for Sukuk, which are Islamic bonds, where the underlying asset is structured as a Murabahah transaction.

This structure ensures that the transaction is based on the sale of an asset rather than lending money, which aligns with the principles of Islamic finance. It allows for the financing of assets while avoiding the prohibition of Riba.