Murabaha is a Sharia-compliant financing structure. It is widely used across Islamic banking. Rather than functioning as a loan, it is structured as a transparent sale, with the profit disclosed upfront. This distinction is central to its acceptance under Islamic law, which strictly prohibits interest-based dealings.
What is Murabaha?
Murabaha comes from the Arabic word Rabah, meaning profit. In commercial use, it refers to a sale in which the seller discloses the asset’s original purchase price and adds a known margin. Both figures are shared with the buyer before the deal is concluded.
This structure differs from conventional borrowing. No money is lent to earn more money. The bank purchases an actual asset and resells it. Payment may be immediate or spread over time, but the final amount is fixed from the outset.
Why Murabaha is permissible
Islamic law does not permit interest because money is not treated as a tradable commodity. Profit must come from risk and ownership. Murabaha meets this requirement because the bank becomes the owner of the asset before reselling it.
During the period of ownership, the bank bears the risk associated with the asset. Only after possession is established does the sale to the customer take place. This transfer of ownership and responsibility is what makes the transaction acceptable under Sharia.
How Murabaha works
A Murabaha transaction begins with the customer identifying a specific asset. The customer then requests the Islamic bank to purchase it. After internal approval, the bank acquires the asset from a third-party supplier.
Once the bank owns the asset, it sells it to the customer at the disclosed cost-plus profit. The customer repays the agreed price in accordance with a defined schedule. Installment due dates and the total payable amount are set at the time of sale.
In some cases, the customer may act as an agent during the purchase. Even then, the asset risk must pass to the bank before resale. Mixing the roles of agents and buyers is not permitted.
Conditions that must be met
Several conditions must be met for a Murabaha sale to remain valid. The asset must exist and be lawful to trade. It must be clearly identified and capable of delivery. Items intended solely for prohibited use are excluded.
Pricing must be certain. Once the sale price is fixed, it cannot be increased for overdue payment or reduced for early settlement. Deferred payment sales are also restricted for certain items, including gold, silver, and currencies.
Direct costs incurred by the bank in acquiring the asset, such as transport or customs charges, may be included in the disclosed cost price.
Payment delays and default
Murabaha does not allow additional charges after the due date. This creates challenges when customers delay payment. Islamic banks often address this risk by limiting future financing access for repeat defaulters.
Islamic principles also emphasize fairness. When a customer faces genuine financial difficulty, extra time may be granted. Willful default, where obligations are deliberately ignored, may result in legal action under applicable regulations.
Common applications
Murabaha is used across multiple sectors. Individuals rely on it for vehicles, property purchases, and household goods. Businesses use it to finance machinery, equipment, and raw materials.
It is also widely applied in trade finance. Murabaha-based letters of credit enable banks to support import transactions while assuming payment responsibility, thereby providing exporters with security.
For instance, if a customer wishes to buy equipment priced at 100,000 AED, the bank purchases the equipment at that price and resells it for 109,000 AED. The customer repays the amount over a fixed period. The markup represents profit from trade, not interest, and remains unchanged throughout the agreement.
Conclusion
Murabaha remains one of the most practical tools in Islamic finance because it is direct and transparent. By relying on real assets, disclosed pricing, and fixed terms, it supports financing needs without relying on interest. In the UAE’s Islamic banking system, Murabaha is a reliable structure for both personal and commercial transactions.
