Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures

Chapter 3Murabahah, Bai Mu'ajjal, and Bai Bithman Ajil

This chapter looks in detail at the contract of murabahah, bai bithman ajil. We also briefly address the underlying issues involved, and briefly look at the concepts of business risk and financial risk to determine whether it is justified to use the word sale in a banking environment.

The contract of murabahah may well be the backbone of much of Islamic banking. Simply put, murabahah is a “cost plus” sale, where a seller discloses to a potential buyer the cost at which a certain asset was sourced or purchased and whereby the seller and buyer subsequently negotiate on the profit margin at which the good or asset is sold to a final buyer.

Bai Murabahah is merely a contract of sale where a seller must disclose the cost price for the subject matter. Bai Musawamah is a contract of sale for a subject matter between a buyer and a seller, where no disclosure of the sale price is required. The asset must be delivered on spot in both transactions, and payment can either be on spot (bai fawri) or deferred (bai mu'ajjal). Bai fawri is also known as bai hall, and is simply a contract of sale and purchase where the subject matter of the sale is delivered on spot and the purchase price is paid on spot. In a contract of bai mu'ajjal, the subject matter of the sale is delivered on spot, and the purchase price is paid in the future. The purchase price may be paid in installments, or as a balloon payment at some time in future or according ...