The following Banking & Finance guidance note Produced in partnership with King & Spalding provides comprehensive and up to date legal information covering:
Murabaha is both one of the most widely used and controversial Islamic finance techniques. Murabaha (often referred to as ‘cost plus profit financing’) involves a minimum of three contract parties and lends itself readily in trade finance and consumer finance to fund the acquisition of assets. However, the murabaha may also be (and often is) used to meet corporate working capital needs, fund acquisitions (eg of land or shares) and can serve as the basis for a deposit product.
Under a typical murabaha arrangement, a customer (the Customer) asks a finance provider (an Islamic financial institution (IFI)) to obtain specified goods from a third-party vendor (the Seller). The IFI purchases the identified goods from the Seller, and then sells those goods to the Customer. The purchase price paid by the Customer to the IFI equals the original purchase price paid by the IFI to the Seller, plus a pre-agreed markup. It is a requirement of murabaha that the original purchase price paid by the IFI to the Seller and any profit the IFI will charge the Customer be disclosed to the Customer by the IFI. The Customer usually pays the purchase price it owes to the IFI—which includes both the purchase price paid by the IFI to the Seller and the IFI’s profit—on a future agreed date or dates.
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