Murabaha
Murabaha is a sale in which the seller discloses its cost and the agreed profit to the buyer. Islamic banks use it to finance purchases by buying an asset and reselling it to the customer on deferred terms.
Also called: murabahah · cost-plus finance · cost-plus sale
In its banking form the customer identifies an asset, the bank buys it from the supplier, and the bank then sells it to the customer at cost plus a disclosed mark-up, payable in instalments. The customer usually gives a promise to buy in advance, but the sale itself can only happen once the bank owns the asset and, for at least a moment, bears the risk of owning it.
Once the sale is concluded, the price is a debt and cannot grow. The bank cannot add a charge for late payment that it keeps as profit; where late-payment charges are imposed, standard practice is that they go to charity rather than to the bank. The mark-up is often set by reference to a market benchmark such as SOFR, which is a pricing reference rather than an interest term.
Murabaha is the workhorse of Islamic retail and trade finance, and also the most criticised for its economic resemblance to a loan. The organised, commodity-based version used for cash liquidity is tawarruq.
In practice
A murabaha in which the bank never owns or bears risk on the asset — for example, where the customer buys the asset and the bank merely pays the invoice — is in substance a loan, and is not compliant however the documents are labelled.
Example
A clinic needs a US$80,000 scanner. Its Islamic bank buys the scanner from the manufacturer for US$80,000, takes title, and sells it to the clinic for US$88,000 payable over 24 months. The US$8,000 mark-up is fixed at signing and does not change if the clinic pays late.
Commonly confused with
| Term | How it differs |
|---|---|
| Conventional term loan | A loan creates a debt of money that accrues interest over time. A murabaha creates a debt of a fixed sale price after a real sale; the price cannot be increased later. |
See also
- TawarruqTawarruq is a structure in which a person buys an asset on deferred payment terms and immediately sells it to a third party for cash, ending up with cash now and a debt payable later. It is widely used and heavily debated.
- Bay' al-'InahBay' al-'inah is a sale and buy-back: a person sells an asset on deferred payment terms and immediately buys it back from the same buyer for a lower cash price, leaving the buyer with cash now and a larger debt later.
- IjarahIjarah is an Islamic lease: the owner of an asset transfers the right to use it for an agreed period in return for rent, while keeping ownership and the risks that come with ownership.
- RibaRiba is the prohibited increase at the centre of Islamic finance: an unjustified excess in a loan or in certain exchanges. It is broader than the English word "interest" and is not limited to excessive rates.
- Ibra'Ibra' is the release or remission of a debt, in whole or in part. In Islamic banking it is the rebate a financier grants when a customer settles a deferred sale price early.