Why is a Murabahah contract termed as a 'cost-plus' sale?

In-Depth Analysis

Murabahah is the fixed price sale and purchase contract permissible under Shariah where the seller discloses the cost of the subject matter of the Murabahah contract along with the profit it is charging to the buyer. Why is the seller required to reveal the cost of goods it is selling to the buyer in terms of a Murabahah contract? This is to instill a high level of transparency in the trade transactions so as to eliminate ambiguity and prevent the seller from charging an exorbitant profit to the buyer. With regard to the first question, it is important to note that in Shariah, Murabahah is not the only contract available to a seller transacting with a buyer. The alternate structure for sale of readily available goods — in the case the seller does not want to reveal the cost of goods and its profit — is called 'Musawamah.' Here too, all the terms and conditions as required in Murabahah shall apply, for example the clean ownership and possession of goods and transfer of ownership and possession to buyer irrespective of the payment terms which could be spot or deferred. The Shariah authenticity for carrying out Murabahah transactions is based on the permissibility of carrying out a sale and purchase in general terms. God Almighty says in Chapter 2 verse 275 of the Holy Quran: 'God has permitted trade and forbidden usury.' In addition, verse 198 of the same chapter states: 'It is no crime for you to seek the bounty of your Lord' — here bounty means earning a profit through trading. Murabahah is the widely used mode of financing with Islamic banks and financial institutions in the modern age. However, it is interesting to note that the term simply refers to a sale transaction with an element of disclosed cost and profit for the benefit of the buyer, and does not necessarily carry the sense of a deferred sale or financing.