×
For more information, get in touch with our team:
+44 7918 53 08 73
Hint mode is switched on Switch off
Glossary

Murabaha

Category — Islamic Finance
Murabaha is the most popular Islamic financing instrument. The word Murabaha derives from the Arabic word Ribh, meaning profit. It is a sale contract in which the price of the commodity is determined, including an agreed profit margin, this margin can be seen as a payment for the services provided.

In the case of the Islamic bank, the bank buys a specific commodity based on the customer’s request, then the bank sells this commodity to the customer at a price higher than the purchase price, indicating the real price and the amount of profit. Then the customer pays the process instalments to the bank according to the previously concluded agreement between them.

Characteristics of the Murabaha contract:

1. Murabaha contracts require full disclosure of the cost to the buyer, the seller discloses the actual costs incurred and asks for a set amount of profit as percentages of the costs.

2. Murabaha transaction is a “deferred payment sale” or an instalment credit sale and is mostly used for the purchase of goods for immediate delivery on deferred payment terms.

3. Murabaha is used to finance the purchase of commodities and goods, fixed assets, cars, real estate, or import and export financing.

Advantages:

1. It enables Islamic banks to use their surplus liquidity.

2. This contract is less risky than other sales contracts such as Salam and Istisna’a, as these two contracts need time to implement and deliver the sale.

3. Murabaha is characterized by relative simplicity, as the profit is calculated as a percentage of the price of the goods, and the relationship between the bank and the customer turns into a creditor-debtor relationship once the Murabaha sale contract is signed.

4. Murabaha financing is characterized by its wide scope due to the variety of goods and services that can be dealt with in the Murabaha contracts.

Disadvantages:

1. Murabaha is criticized by many as an instrument that opens the “back door” to interest.

2. Risks of variation in specifications and the appearance of hidden defects.

3. Credit risks if the buyer stops paying instalments.
Terms from the same category