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.
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.
From the customer's quote to the 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.
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.
Specialist external source
The AAOIFI Shariah standard on Murabaha sets out the purchase promise, prior possession, permissible security and how late payments must be handled.