Murabaha

Murabaha is a form of Islamic finance transaction that finances the purchase of goods through a cost-plus sale. It is structured to comply with Shariah by avoiding interest (riba) and excessive uncertainty (gharar). The bank acts as an intermediary, acquiring the asset and selling it to the client with a disclosed profit margin.

In a typical murabaha, the client identifies a need for a commodity or asset. The financial institution buys the asset from a supplier at market price and takes title to it. It then sells the asset to the client at the same price plus a pre-agreed profit margin, with payment deferred over a specified period. The total price and payment schedule are fixed and disclosed up front. The client takes delivery of the asset, while payments are made over time.

Key features include asset backing, a fixed profit margin disclosed up front, and transparency about the cost and profit. The transaction is a sale rather than a loan, and ownership transfers to the buyer at the time of sale. Murabaha is widely used for consumer purchases such as cars and equipment, and for corporate procurement. Banks may require shipment, delivery, and insurance arrangements.

Criticisms and considerations: While it avoids riba, critics argue the pre-set markup can resemble interest; some structures may create liquidity constraints or be used for speculative purposes; regulatory treatment varies by jurisdiction; governance requires Shariah boards to review transactions.