What is murabaha?

How murabaha works

The word comes from ribh, meaning profit. In its simplest form it's an old trading practice: "I bought this for 100, I'll sell it to you for 110." Islamic finance uses it like this:

• You choose a car, say worth £20,000.
• The bank buys it from the dealer and owns it, even briefly.
• The bank sells it to you for an agreed price, for example £23,000.
• You pay that fixed amount in monthly instalments. It never increases if you take longer.

Islamic car and home finance often uses murabaha or a lease model. See Is Islamic car finance halal? and How does an Islamic mortgage work?

Why it isn't interest

A loan of money for more money is riba. A sale of goods for a profit is trade, and the Quran draws exactly that line:

In murabaha the bank sells a real item that it owned and took risk on. The price is set once. With an interest loan, the debt grows with time; with murabaha, it doesn't.

Conditions scholars require

• Real ownership: the bank must own the item before selling it. The Prophet ﷺ told Hakim ibn Hizam not to sell what he did not have (Sunan Abi Dawud 3503).
• Known cost and profit: both are stated clearly at the start.
• No growing penalties: late fees should not become extra profit for the bank. Many Islamic banks give any late charge to charity.
• Real goods: buying and immediately reselling metals just to produce cash (tawarruq) is debated, and many scholars criticize the organized version.

The common criticism

Some people say murabaha is just interest with a new name, because the profit is often benchmarked to interest rates. Most scholars answer that using a rate as a measuring stick doesn't change the contract: the price is fixed and the bank carries ownership risk. See Is Islamic banking just interest with another name?