Morabaha refers to a sale transaction where the seller reaches an agreement with the buyer to provide him with a specific commodity at a marked up price. The transaction is similar to that of a trader with the exception that the seller discloses the actual cost of procuring the asset. The buyer then pays the sum back to the seller in fixed installments.

Basic Features of Morabaha Financing

1. Morabaha is the sale of a commodity for a deferred price, which includes an agreed profit, added to the actual cost.
2. Morabaha can only be used to finance the client’s needs to purchase tangible commodities. Funding for other operational requirements cannot be met through Morahaba.
3. The commodities must be purchased from a third party, therefore products in the ownership of the buyer cannot be financed.
4. The discerning feature between a Morabaha and a loan is that the financing institution must bear the risk of ownership, even if for a short period, before transfer of ownership to the client.
5. In exceptional cases, where direct purchase from the supplier is not possible for some reason, it allowed that the seller appoint the customer itself as an agent to buy the commodity on its behalf. The buyer’s possession over the commodity in the first instance is in the capacity of an agent of the seller. In this, the buyer is only a trustee, while the ownership and risk vests with the seller, but when the buyer purchases the commodity from the seller, the ownership as well as the risk is transferred to the buyer.

Morabaha Financing by Financial Institutions

Financial institutions can use Morabaha financing by appointing the party in need of a particular asset as its purchase agent. The party purchases the asset on behalf of the financial institution which it buys back at a deferred price (actual cost plus profit). This price is paid back in fixed installments.

Security against exposure

A security can be acquired to ensure prompt payments from the client. This can include a promissory note or a bill of exchange, but it must be obtained after the actual sale takes place.

Default from buyer

In case the buyer defaults, Islamic law does not allow implementation of a penalty. However, a deterring factor can be included in the agreement in an additional clause. The permissible clause is to charge an amount that will be paid to a charitable cause. This amount does not accrue to the creditor nor does it form a part of its income. In a way it becomes a charity contribution made by the client necessitated on default.

Rules of Sale

1. The sale must be instant and absolute. Thus a sale attributed to a future date or a sale contingent on a future event is void.
2. The object of sale must be a property of value. Thus, a thing having no value according to the usage of trade cannot be sold or purchased.
3. The object of sale should not be forbidden in Islamic law, like pork, wine etc.
4. The object of sale must be specifically known and identified to the buyer.
5. The delivery of the commodity to the buyer must be certain and should not depend on a contingency or chance.
6. The price must be certain if the sale is to be valid. If the price is uncertain, the sale is void.