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BAI -Murabaha(TR) Interest Calculation Sheet-With Practical Examples
Murabaha is a form of Islamic finance commonly used for trade and investment. It involves a cost-plus financing structure where a financial institution purchases an asset and sells it to the client at a marked-up price, which is paid over time. The profit margin is agreed upon upfront, making it compliant with Islamic law, which prohibits riba (interest).
Key Features of Murabaha:
1.Cost-Plus Financing:
The bank buys the asset and sells it to the borrower at a higher price, which includes a profit margin.
2.Transparency:
The terms of the sale, including the cost and profit margin, are clearly stated and agreed upon in advance.
3.Installment Payments:
The borrower typically pays in installments over a specified period.
Interest Calculation in Murabaha
In the context of Murabaha, the concept of "interest" does not apply in the conventional sense, as the financing structure is based on profit margins rather than interest rates. However, you can calculate the total cost and monthly payments in a way that reflects the financing terms.
Calculation Sheet Structure
To illustrate how Murabaha works, let’s use the following hypothetical scenario:
Asset Cost: $10,000
Profit Margin: $2,000
Total Sale Price: $12,000
Tenure: 2 years (24 months)
Payment Frequency: Monthly
Example Calculation
Total Sale Price:
2.Monthly Payment Calculation:
Divide the total sale price by the number of months to determine the monthly installment.
Summary of Payments
Total Asset Cost: $10,000
Profit Margin: $2,000
Total Sale Price: $12,000
Monthly Installment: $500
Total Amount Paid Over 2 Years: $12,000 (24 installments of $500 each)
Practical Application
Let’s assume a business needs to purchase a vehicle using Murabaha financing:
Vehicle Cost: $20,000
Profit Margin Agreed: $4,000
Total Price after Markup: $24,000
Loan Tenure: 3 years (36 months)
Calculation Steps
Total Sale Price:
Monthly Payment:
Summary of the Vehicle Purchase
Total Cost of Vehicle: $20,000
Profit Margin: $4,000Total Sale Price: $24,000
Monthly Payment: $666.67
Total Paid Over 3 Years: $24,000 (36 payments of $666.67)
Conclusion
Murabaha financing provides an alternative to conventional loans by facilitating asset purchases through a profit-sharing model rather than interest-based lending. Understanding the calculation of total costs, profit margins, and installment payments is essential for both lenders and borrowers in structuring Murabaha agreements. This approach not only complies with Islamic financial principles but also ensures clarity and transparency in financial transactions.