A person wants to buy a car for €20,000 but does not have the money. With a conventional loan, the bank lends €20,000 and the person repays more: the principal plus interest. With a murabaha, the bank buys the car, then resells it to the person for €22,000, payable in monthly instalments. The final amount can be the same. The nature of the contract is what changes.
A sale, not a loan
riba means any surplus demanded in exchange for a loan of money. The Quran sets it against trade:
Allah has permitted trade and forbidden riba.1
Quran, surah 2, verse 275
Murabaha avoids this surplus because it does not lend money: it sells a good at a known price, its purchase cost plus a margin disclosed to the customer.
The steps
- The customer chooses the good and asks the bank to finance it. The customer may promise to buy it afterwards (waʿd).
- The bank buys the good from the seller and becomes its owner.
- The bank resells the good to the customer: purchase price plus margin, both written in the contract.
- The customer pays in one go or in instalments. The price no longer changes.
The order matters: the bank must have bought the good, and bear the risk on it, before reselling it2.
What sets it apart from a loan
| Criterion | Conventional loan | Murabaha |
|---|---|---|
| Subject of the contract | A loan of money | The sale of a good |
| Bank’s gain | Interest on the sum lent | A margin on the sale price |
| Total amount | May vary (variable rate) | Fixed at signing |
| Late payment | Late-payment interest for the bank | No extra amount for the bank3 |
Points to check
Murabaha is criticised when it is compliant only in appearance. Three questions help to check:
- Did the bank really buy the good? Without ownership or risk, the transaction becomes a disguised loan2.
- Is the price fixed once and for all? A price that rises with delay brings the transaction closer to interest.
- Are the good and the price precisely described? Uncertainty about the object or the price (gharar) makes the contract invalid.
Another frequent criticism: the margin is often calculated from market interest rates. Many scholars accept this as a mere price benchmark, but the practice remains debated.
Going further
The glossary presents the other financing contracts: ijara (leasing), musharaka (partnership), salam and istisna (sales for future delivery). The table of AAOIFI standards, at the bottom of the Glossary page, groups them by family.