Profit rate in Islamic finance
Simply put
In Murabaha, Tawarruq and Ijara, the financier's return is called profit or rent, not interest, because it arises from a sale or a lease. But for the financed business it is a finance cost that appears in the income statement.
Watch the calculation method: a rate quoted on the original amount for all years of the contract gives an actual cost higher than the rate, because you repay part of the amount with each installment. The standards spread the finance cost over the term using the effective interest rate method.
Worked example
A car showroom bought transport vehicles costing 200,000 SAR with Murabaha financing at a deferred price of 230,000 SAR over 3 years. The allocation here is straight-line for illustration only.
Formula: Profit margin = deferred price − cost of the asset