Murabaha is a sale in which the seller, having first acquired and taken possession of an asset, resells it to the customer while disclosing the actual purchase price and the added margin, with the agreed total payable at once or in instalments. As a cost-plus sale, Murabaha financing gives the customer a fixed price known in advance, and the bank earns a trading profit for owning the asset between its purchase and its resale.
What Murabaha financing is used to buy
Murabaha financing covers goods that can be identified and delivered: a car, household equipment, stock for a shop, raw materials, machinery, a property already built. It is less suited to services or to cash needs without a purchase behind them, because the contract requires a real asset that the bank can acquire. A customer who wants only money, with nothing to buy, cannot normally be served by this contract.
For businesses, Murabaha is a common way to finance imports and working capital. The bank buys the goods from a foreign or local supplier, takes title and resells them to the company on deferred terms. The company receives the stock it needs, and the repayment is organised around the sale it expects to make, with no variable interest to monitor.
Murabaha as a trust sale: disclosed cost plus a margin
Jurists class Murabaha among the trust sales: the buyer accepts a price because the seller reveals what was paid. The margin can be stated as a lump sum or as a percentage of cost, but it must be known before conclusion.
What exactly must the seller disclose?
The seller states the price paid, the currency, any supplier discounts received and, where relevant, the fact that it bought on credit itself. A purchase from a related party must also be flagged, as it can artificially inflate the margin base.
Incidental costs that may be added
Freight, customs duties, transit insurance or registration fees can be added to the cost price when they are customary in the trade concerned. The bank's own overheads, however, are not part of the asset's cost and have to be recovered through the margin.
Misstated or concealed purchase price
If the buyer finds that the declared cost exceeded the real one, the schools of law give them either a proportionate price reduction or the right to cancel the sale. An inaccurate declaration is therefore far more than a minor lapse in commercial information.
A numerical example of a Murabaha margin
Suppose a customer needs machinery that the supplier sells for 90,000, with 2,000 of transport and customs paid by the bank. The bank's disclosed cost is 92,000. If the parties agree a margin of 10,000, the resale price is 102,000, payable over twelve equal monthly instalments of 8,500. That price is now a debt and cannot be raised later, whatever happens to market rates.
The same example shows what the customer should check: that the cost figure matches the supplier's invoice, that the transport and customs are real and customary, that the margin is stated in the contract and that the instalment schedule adds up to the total. A Murabaha margin that is described as a rate per year deserves a question about how the total was derived, since the contract price is what binds.
From the customer's quote to the Murabaha resale deed
In practice the customer selects the asset and passes on a supplier quotation. The bank then buys the asset in its own name, takes possession of it, and resells it to the customer under a second contract stating cost, margin and payment schedule.
Is the customer bound by the purchase promise?
To avoid being left with unsold goods, the bank asks for a unilateral promise to buy. Under AAOIFI rules this promise can be made binding, yet it is not a sale: if the customer withdraws, the bank may only claim the actual loss it suffered.
Appointing the customer as purchasing agent
The bank sometimes appoints the customer as its agent to buy the asset on the bank's behalf. Two distinct steps are then required: the purchase as agent, then a separate resale, with the supplier's invoice issued to the bank rather than to the customer.
When the bank carries the risk
Between its purchase and the resale the bank is the owner: if the asset is destroyed or turns out to be defective, the loss falls on the bank. This exposure, however short, separates a trading margin from interest, which simply rewards money lent over time.
Documents that support a Murabaha financing
Several documents form the paper trail of a proper Murabaha. The customer's request and promise to buy come first, then the supplier's quotation, the purchase order and invoice in the bank's name, the proof of delivery to the bank or to its agent, and finally the resale agreement. Dates matter: the invoice and the transfer of possession must come before the resale, otherwise the bank would be selling something it did not yet own.
Customers sometimes receive the paperwork in a single bundle and sign without reading. It is wise to ask for each document separately and to confirm that the bank has genuinely paid the supplier. Where the bank asks the customer to pick up the goods as its agent, the appointment letter and the customer's receipt should be dated before the Murabaha resale agreement.
Reading the calculator's output
The calculator below the text starts from the amount financed, a margin rate and a number of months. It gives an estimate of the monthly instalments and of the total sale price, leaving out arrangement fees, insurance and each provider's own lending conditions.
A fixed total margin and level instalments
Once the resale is signed, the price becomes a fixed debt that the bank cannot raise, even if market rates climb. A benchmark rate may be used to work out the initial margin, provided the final amount is locked into the contract at signing.
Late payment and the charity undertaking
A Murabaha debt cannot be increased because of late payment, as that would be riba. Many contracts instead require a defaulting customer to pay an amount to charity, supervised by the Sharia board and never booked as income by the bank.
Rebates for early settlement
A customer who settles before maturity has no automatic right to a reduction, since the price is fixed. The bank may still grant a rebate known as ibra, which some regulators require for retail customers, so check this clause carefully before signing.
Guarantees and collateral on a Murabaha debt
Once the resale is concluded, the customer owes a fixed debt, and the bank may ask for security to protect its claim. Common forms are a pledge over the purchased asset, a mortgage on property, a personal or corporate guarantee and post-dated cheques. These are accepted because they secure a debt and do not change its amount; the price does not grow because the security was taken.
The bank may not use the pledged asset to claim more than the debt, and any surplus on a forced sale belongs to the customer. If the customer cannot pay, the contract can provide for rescheduling of the same amount. What cannot happen is a larger price for the extra time, since that would turn the Murabaha financing into a charge on the debt.
- Match the cost figure in the contract to the supplier's invoice.
- Check that the total price equals the sum of the instalments.
- Read the clause on late payment and the destination of any charity amount.
- Ask whether an early settlement rebate is granted and how it is calculated.
Providers offering these services
- Alinma Bank (corporate financing) : Alinma Bank lists its Shariah-compliant corporate financing products, including Murabaha.