Murabaha

Murabaha is a sale in which the seller discloses the original acquisition cost and adds a known profit margin. In contemporary Islamic banking, the customer identifies an asset, the financier purchases it from a supplier, and the financier then sells it to the customer at a fixed price, often payable over time.¹

The sequence matters. The financier should acquire ownership or a legally recognized form of possession before reselling the asset; otherwise the arrangement may resemble a financing of money rather than a sale. The customer’s obligations, delivery terms, security, and consequences of default are documented in contracts. The final sale price may exceed the cash price because payment is deferred, but it is fixed when the sale is concluded rather than increased merely because of elapsed time.

Murabaha derives its legitimacy from the general permissibility of trade in Islamic commercial law and the prohibition of riba, commonly translated as interest or usury.² Its economic rationale is that profit is earned through a sale involving an asset, contractual risk, and a disclosed price, not by charging for the use of money alone.

The markup is not required to correspond to a particular interest-rate formula, although institutions may use market benchmarks to help price transactions. That practice does not by itself determine compliance; the legal form and substance of the sale remain relevant. Shariah governance therefore examines the asset, ownership sequence, documentation, agency arrangements, and treatment of late payment. National regulators and institutional Shariah boards can apply somewhat different standards, making local rules significant.

Murabaha is widely used for trade finance, working capital, consumer goods, vehicles, real estate, and short- to medium-term asset acquisition. A bank may appoint the customer as its purchasing agent, but the agency agreement should be distinct from the subsequent sale so that the financier’s acquisition is not merely nominal.³

Risk management commonly includes collateral, guarantees, insurance or takaful, and promises to purchase. A promise is generally treated differently from the completed sale: the sale itself should not be concluded before the financier has acquired the asset. Late-payment sums are also handled restrictively in many frameworks; they may be directed to charitable purposes rather than recognized as ordinary bank income. Accounting, disclosure, and capital treatment are shaped by standards from bodies such as AAOIFI and the Islamic Financial Services Board.⁴

Murabaha is not limited to tangible retail goods, but the underlying subject must be sufficiently identifiable and legally transferable; money itself cannot simply be resold at a markup as though it were an ordinary commodity. The contract is consequently distinct from mudarabah, which is a profit-sharing partnership, and from ijara, which transfers usufruct through leasing.

A related but separate practice is commodity tawarruq, in which a customer obtains cash through linked commodity sales. Its permissibility has generated debate among Shariah scholars and regulators because the economic result can closely resemble cash financing. Murabaha also differs from salam, where the price is paid in advance for specified goods delivered later, and from sukuk, which represent interests connected to assets or ventures rather than a single cost-plus sale. These distinctions show why the label alone does not establish the contract’s substance.²

Riba

A prohibited increase associated with lending or exchange in Islamic commercial law, commonly translated as interest or usury.

Markup

The disclosed profit added to the seller’s known acquisition cost in a Murabaha sale.

Tawarruq

A financing arrangement involving successive commodity transactions intended to provide liquidity; it is distinct from ordinary Murabaha.

Shariah board

A body of specialists that reviews whether an Islamic financial institution’s products and operations conform to relevant Islamic-law standards.