Murabaha is an Islamic financial contract widely used in Islamic banking. It involves the sale of a commodity or real estate with a markup, where the seller and buyer pre-agree on the markup. The Murabaha contract is typically used instead of conventional loans in various areas, such as purchasing cars, real estate, equipment, machinery, raw materials, or imported goods.

Example of a Murabaha contract: Buyer A wants to purchase a $50,000 car. They approach a bank that offers financial services through a Murabaha contract. The bank buys the car from a dealer specified by buyer A, based on the car's specifications, for $50,000 and then resells it to buyer A for $60,000, which can be paid in installments over three years. The amount buyer A pays is fixed in advance to the bank. Note: In a Murabaha contract, unlike a traditional credit contract, the price of the commodity remains fixed. Penalties and fines imposed by Islamic financial institutions in case of customer payment default are used as a means of discipline and do not go to the Islamic bank or lender but are directed towards charitable purposes, except in cases of intentional non-compliance by the customer, in which the Islamic bank may seek compensation for its losses.

Key characteristics of the Murabaha contract:

1. Murabaha is a type of sale in which the seller explicitly states the costs incurred for acquiring the commodity and sells it to another party, adding a profit or markup to that cost.
2. The profit in Murabaha can be determined through mutual agreement, either as a fixed amount or by agreeing on a profit coefficient added to the seller's cost.
3. All expenses incurred by the seller in acquiring the commodity, such as freight, customs duties, and others, must be included in the commodity's cost, and the markup can be applied to the total cost. However, recurring expenses of the seller, like staff salaries and rent, cannot be separately included in the cost of a specific transaction because the profit declared above the costs already accounts for these expenses.
4. Murabaha is only valid if the exact cost of the commodity can be established. If it is impossible to determine the exact cost, the commodity cannot be sold under a Murabaha contract. In such cases, the commodity must be sold under a Musawama contract (a trade transaction), without a direct link to cost or profit markup.
5. The validity conditions of a Murabaha contract are subject to Islamic financial law for the sale of goods, including deferred payment terms if the commodity is sold with deferred payment.