Definition of Murabahah

Financial Terms Beginning with M

What is Murabahah

Murabahah is a widely-used financing concept in Islamic finance, providing a Sharia-compliant alternative to conventional interest-based loans. In Islamic finance, the charging of interest (riba) is strictly prohibited, as it is considered unjust and exploitative. Murabahah is based on the principles of transparency, fairness and risk-sharing, which are essential elements in Sharia-compliant financing.

Murabahah financing operates through a cost-plus-profit model, where a financial institution, such as an Islamic bank or a non-banking financial institution, purchases an asset on behalf of its client. The asset can be of various types, such as real estate, machinery, equipment or commodities, depending on the client's needs. The financial institution then sells the asset back to the client at a marked-up price, with the original cost and profit margin disclosed upfront. This transparency is a critical aspect of Murabahah, ensuring that both parties understand the financial arrangement and agree to the terms.

How Does Murabahah Work

The client, after purchasing the asset from the financial institution, typically pays the marked-up price in installments over a predetermined period. This deferred payment structure allows the client to avoid the burden of a large upfront payment and instead, gradually pay off the asset. It also provides the financial institution with a profitable return on investment without resorting to interest-based transactions.


Where is Murabahah Used

Murabahah financing is utilized in various sectors, including trade financing, consumer financing and project financing. It caters to both individual and corporate clients, offering a Sharia-compliant alternative for financing needs, such as home mortgages, vehicle financing and working capital.

Advantages of Murabahah

One of the key advantages of Murabahah financing is the lower risk profile compared to conventional loans, as it involves a tangible asset as collateral. This aspect reduces the likelihood of default and ensures that both parties have a vested interest in the successful completion of the transaction.

Risks of Murabahah

Despite its benefits, Murabahah financing is not without challenges. Critics argue that the profit margin charged by the financial institution can be seen as a disguised form of interest. However, proponents of Islamic finance maintain that the markup is fundamentally different, as it is based on the risk and effort involved in purchasing and selling the asset, rather than the time value of money.


Final Thoughts on Murabahah

In conclusion, Murabahah is a widely-adopted Islamic financing structure that offers a Sharia-compliant alternative to conventional interest-based loans. It is based on the principles of transparency, fairness and risk-sharing and involves the purchase and sale of tangible assets with a disclosed cost and profit margin. By providing a flexible and ethical financing solution, Murabahah has become an essential tool in the world of Islamic finance.

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Related Investment Terms

Islamic Finance



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