Murabaha

Say a customer wants to buy a car but does not want to take an interest-bearing auto loan. Under murabaha, the bank first purchases the car from the dealer, taking legal ownership of it. The bank then sells the car to the customer at a higher, disclosed price, for example cost plus a fixed profit margin, payable in installments over an agreed term. Both the cost and the markup are disclosed to the customer before the sale, which is required for the contract to be valid (murabaha literally means a sale with disclosed cost and markup). The customer's payment obligation is fixed once the sale is complete; it does not fluctuate with interest rates the way a conventional variable-rate loan would, and it is structured as deferred payment for a good already sold, not as interest charged on borrowed cash.

The distinction that matters in Islamic law is that murabaha is a sale of a real asset, with the bank briefly taking ownership and bearing the ownership risk, however briefly, before reselling. A conventional loan simply transfers cash with a promise to repay more cash later, which is riba. In murabaha, the bank must actually own the asset before selling it; skipping that step (having the customer buy the asset directly and merely reimbursing the bank later with a markup) is a common structuring error that invalidates the contract under most Shariah standards, since it would just be interest with extra paperwork attached.

Murabaha is the workhorse contract of retail Islamic banking. It underpins Islamic home financing (the bank buys the property and resells it to the buyer at a markup), auto financing, business inventory and trade finance, and short-term working capital facilities. Murabaha-based sukuk package a portfolio of these trade receivables into a tradeable certificate, giving investors exposure to the profit margins generated across many individual murabaha transactions rather than to a single deal. Because the markup and payment schedule are fixed at the outset, murabaha products tend to behave like fixed-rate financing from the customer's point of view, which makes them a practical, familiar substitute for conventional installment loans.

Murabaha is more contested among scholars than profit-and-loss-sharing contracts like mudarabah or musharakah, precisely because a poorly structured murabaha can look and behave almost exactly like an interest loan with a relabeled markup. Some contemporary economists and scholars argue the industry leans on murabaha too heavily because it is simpler to replicate a conventional loan than to build genuine risk-sharing products. Reputable Islamic banks address this by requiring documented, sequential steps: the bank must purchase the asset, hold title (even briefly), and only then execute a separate sale to the customer. Skipping or backdating any of those steps is what draws legitimate criticism, not the murabaha structure itself when properly executed.