What are Murabaha Contracts?

Confused by Murabaha contracts (a form of financing contract often used within Islamic banking), I needed a diagram in order to fully understand it. Luckily, I found the above diagram in a linked-in post on Murabaha contracts by the CEO of Citi Islamic Investment Bank, Bahrain.

Murabaha contracts refer to the sale of goods on a pre-agreed profit mark-up, where the seller has disclosed to the buyer both the cost of purchase and the amount of profit they will make with the sale. The diagram clearly shows each of the steps involved in Murabaha contracts, which may described as follows:

STEP 1 — Prior to the contract, the buyer expresses their desire to purchase an item, and the need for financing to assist them. The promise to buy is not an integral part of the Murabaha contract, but provides assurance to the seller that they will not be left with goods without a purchaser. To be valid, the promise to buy must include an option to cancel.

STEPS 2–3 — The seller purchases the asset desired by the buyer from the supplier.

STEP 4 — Having purchased and taken delivery of the goods, the seller can now enter a Murabaha contract with the buyer. The seller discloses the cost of purchase of the product, and the profit margin, and a contract is signed for the buyer to purchase the asset from the seller through short-term or…