Murabaha, in its original Islamic association, is simply a kind of sale. The only feature distinguishing it from other kinds of sale is that the seller in Murabaha explicitly tells the purchaser about the cost he has incurred and the profit he is going to charge in addition to the cost. If a person sells a commodity for a lump sum price without any reference to the cost, this is not a Murabaha. Despite the fact that he is earning some profit on his cost, it’s not a Murabaha because the sale is not based on a “cost-plus” concept.

In Islamic Banking, Murabaha is used as a mode of financing where the client needs funds to purchase some commodities. The Customer, intending to utilize the Murabaha facility, identifies the commodities (‘assets’) he needs to purchase through Murabaha facility. The Bank purchases the assets from Supplier and then sells the same to the Customer against an agreed price (including disclosed profit portion) on deferred/spot payment basis.