A letter of credit for Murabaha is given on behalf of the applicant, or importer. The bank that issues the credit letter promises to make a payment by the conditions specified in the document. Since the applicant's creditworthiness is replaced by the bank's, payment to the recipient (exporter) is assured. Because the bank is taking on the payment risk, this is advantageous to the exporter. By the terms of the Murabaha contract, the importer must reimburse the bank for the cost of the products plus a profit margin. The following are the main benefits of Murabaha;

First, the benefit of Murabaha is Sharia Adherence. Steer clear of riba (usury). This is because Murabaha transactions don't entail the giving or receiving of interest (riba), they adhere to Sharia law. This is consistent with the Islamic ban on interest. Islam forbids riba, as stated in the Quran and Hadith (the sayings and deeds of Prophet Muhammad). Murabaha transactions avoid the payment or receipt of interest. Instead, the financier earns a transparent profit through the sale of goods. In general, the attraction and acceptability of Murabaha in the Islamic financial system are largely dependent on the avoidance of riba. A dedication to moral and Sharia-compliant behavior sets Islamic finance apart from traditional finance in the interest domain.

 The next benefit of Murabaha is structured and transparent transactions. In a Murabaha transaction, the asset's purchase price and the predetermined profit margin are revealed up front in a Murabaha deal. This openness guarantees that from the start of the transaction, both the seller and the buyer will understand the financial parameters. The pricing structure in Murabaha is straightforward. The cost price of the asset is precisely known to the buyer, as is the extra sum that represents the seller's profit margin. This clarity removes all doubt regarding pricing. Before the transaction takes place, both parties agree on the cost and the profit margin. This mutual agreement on the terms of the transaction helps establish a fair and transparent basis for the financial dealings. Besides, pricing transparency encourages transaction fairness. It makes sure that everyone is aware of the financial parameters, which lessens the possibility of miscommunication or disagreements brought on by imprecise pricing. In general, Murabaha transactions are visible and organized, which guarantees that the financial transactions are fair, transparent, and comply with Sharia law. One of the main reasons why Murabaha is a popular and commonly used type of Islamic financing is because of its openness.

Lastly, the benefit of Murabaha is Facilitates Trade. Because Murabaha offers a way to finance the acquisition of products, it can be utilized to facilitate commerce. In the aspect of trade financing, Murabaha is a funding system that complies with Sharia law, making it a useful instrument for trade facilitation. It enables companies to make the ethical and well-structured financial arrangements necessary to obtain the items they want for production or commerce. Businesses often require financing to acquire assets for trade, production, or expansion. Murabaha enables them to purchase these assets while adhering to Islamic principles. Due to Murabaha's flexible financing options, firms can purchase particular commodities or things that are required for trade. Finished goods, inventories, or raw materials may be included, based on the trading requirements of the company. Murabaha transactions allow for the customization of payment terms. Buyers and sellers can negotiate and agree upon a payment schedule that suits the financial capabilities and preferences of the buyer, fostering a more accommodating trade relationship. In summary, Murabaha's role in facilitating trade demonstrates its versatility and applicability in supporting businesses engaged in commerce. Within the scope of Islamic finance, it is a desirable and moral choice for trade financing due to its adherence to Sharia rules.

The Messenger of Allah صَلَّى الـلّٰـهُ عَلَيْهِ وَاٰلِهٖ وَسَلَّم stated, “On the Night of Ascension, I passed by a group of people whose stomachs were like houses, and they contained snakes that could be seen from outside. So, I asked, ‘Jibrīl! Who are they?’ He replied, ‘They are those who would consume interest.’” Sunan Ibn Mājah, vol. 3, p. 71, hadith 2,273

Murabahah offers an effective and ethical substitute for interest-based funding in the financial sector, since typical transactions frequently involve it. By establishing and agreeing upon the profit margin beforehand, Murabahah fosters a financial system that is not only compliant with Islamic law but also with broad principles of economic justice and ethical conduct. Within the field of Islamic finance, Murabaha is further distinguished by the idea of ownership and possession. The requirement that the seller possess the item before selling it guarantees a tangible and authentic foundation for the transaction.

Hussain S. (2023, May 3). An introduction to Murabaha. Qardus. https://www.qardus.com/news/an-introduction-to-murabaha

THEACCSENSE. (2023, January 2). An overview of Islamic contract: Murabahah. https://www.theaccsense.com/finance/islamic-finance/overview-of-islamic-contract-murabahah/

FasterCapital. (2023, November 22). Benefit Of Murahaba.

https://www.fastercapital.com/content/Fixed-payment-contracts--The-Benefits-of-Murabaha-Financing.html

Alfatakh, A. (2015, July 11). The difference between Islamic banking financing and conventional banking loans – Islamic Bankers Resource Centre. Islamic Bankers Resource Centre. https://islamicbankers.me/tag/the-difference-between-islamic-banking-financing-and-conventional-banking-loans/

In accordance with the Islamic law's prohibition on interest (riba), the markup in the Murabaha concept serves as a substitute for the interest frequently associated with conventional loans. Because of this, Murabaha does not require a loan with interest; instead, it works as an allowed credit sale that follows Islamic law.

·         Shariah proof of Murabaha

i.                    The Quran, the main source of the Shariah, provides specific instructions on the permissibility of engaging in trading, selling, and purchasing activities.  

“…Allah has permitted sale, and prohibited Riba…” (Al-Baqarah: 275)

Hence, in accordance with the verse above, all types of transactions are considered legal unless they include prohibited goods or are conducted in violation of the established principles and contractual obligations of the Shariah. This perspective is crucial for justifying the implementation of Murabaha.

·         Rules and conditions of Murabaha sales

The Shariah principles require that for a sale to be valid...

i. The presence of the subject content is a must for the completion of a transaction.

ii. The subject matter of the transaction has to comply with legal requirements. The act of selling products that are illegal, such as liquor and meat, is strictly forbidden. The determination of the subject matter information should include its nature, quality, and quantity.

iii. It is essential that the individual selling the item is the rightful owner of this item.

·         Application of Murabaha in financial services

The Murabaha method is used in a transaction referred to as Murabaha to the purchase order (MPO), which involves three different parties.

i.                    the Islamic Financial Institution (IFI),

ii.                  the supplier,

iii.                the purchase orders.

The Murabaha credit sale refers to the transaction when an Islamic financial institution (IFI) sells a specific asset to a purchaser based on a declared mark-up price. This mark-up price is determined by the IFI's cost of financing the purchase.

Example:

The individual applies to an IFI for a purchase order with the intention of obtaining an automobile via a Murabaha sale contract. The bank buys the automobile from the supplier for RM100,000 and thereafter extends credit to the purchase orderer for RM120,000, with a repayment period of 5 years.

The supplier generates sales profit, while the lender generates financing profit via a mark-up sale.

Next in terms of Interest (Riba), Murabaha is the type of financing that is designed to adhere to Islamic regulations, which means that interest is not allowed to be paid or received. Meanwhile, under the commercial bank, one of the mainstays of conventional lending is the interest payment, which is usually associated with bank loans. The bank charges an interest rate in exchange for the money' usage.

Lastly, in terms of ownership and risk under Murabaha, the asset is usually owned by the bank prior to being sold to the customer. This implies that up until the asset is sold, the bank bears all ownership risk. However, under the commercial bank loan, the borrower bears ownership and risk of the assets purchased with the loan money. The ownership of the particular assets is usually not taken over by the bank.