How does Bay al-Murabahah work as a financial instrument?
Bay al-murabahah (Sales Contract at a Profit Mark-up) In the classical fiqh literature, there is a sales contract called bay muajjal which refers to sale of goods or property against deferred payment (either in lump sum or instalments). Bay muajjal need not have any reference to the profit margin that the supplier may earn. Its essential element that distinguishes it from cash sales is that the payment is deferred. Strictly speaking, the deferred payment can be higher than, equal to or lower than the cash price. There is another sale contract known as bay al-murabahah, which refers to a sale in which the seller declares his actual cost and the parties agree on adding a specific profit margin. Basically, this is a two party buying and selling contract. No financial intermediation is involved. The Islamic banks have created a mode of finance by combining the concepts of bay muajjal and bay al-murabahah. They use this contract as a mode of finance in the following manner. The client order
