Murabaḥah

Murabaḥah, murabaḥa or murâbaḥah (Arabic مرابحة) is an Islamic term for a sale where the buyer and seller agree on the markup for the item(s) being sold. In recent decades it has become a term for "the most prevalent financing mechanism" in Islamic (i.e. "shariah compliant") finance, based on murabaḥa purchases. As an Islamic financing structure, the seller is the "lender", typically selling something the borrowing person or company needs for their business. The buyer/borrower pays in periodic installments, and at a higher price than the seller/lender paid for the item(s), but with a profit margin agreed on by both parties. The profit made by the seller/lender is not regarded as interest on a loan, (or any kind of compensation for the use of the lender's capital), as this would be forbidden as riba. Instead it is seen as "a profit on the sale of goods". Murabaha is similar to a rent-to-own arrangement, with the intermediary retaining ownership of the property until the loan is paid in full.

As the requirement includes an "honest declaration of cost", Murâbaḥah is one of three types of bayu-al-amanah (fiduciary sale). The other two types of bayu-al-amanah are tawliyah (sale at cost) and wadiah (sale at specified loss). If the exact cost of the item(s) cannot be or are not ascertained, they are sold on the basis of musawamah (bargaining). Different banks use this instrument in varying ratios. Typically, banks use murabahah in asset financing, property, microfinance and commodity import-export. The seller may not use Murâbaḥah if profit-sharing modes of financing such as mudarabah or musharakah are practicable. Since those involve risks, they cannot guarantee banks any income. Murabahah, with its fixed margin, offers the seller (i.e. the bank) a more predictable income stream. A profit-sharing instrument, conversely, is preferable as it shares the risks more equitably between seller and buyer.

There are, however, practical guidelines in place which aim to ensure that the Murâbaḥah transaction between the bank and the customer is one based on trade and not merely a financing transaction. For instance, the bank must take constructive or actual possession of the good before selling it to the customer. Whilst it can be justified to charge an additional margin to the customer to reflect the time value of money in terms of actual payment not being received from the customer at time zero, the bank can only impose penalties for late payment by agreeing to purify them by donating them to charity.

The accounting treatment of Murâbaḥah, and its disclosure and presentation in financial statements, vary from bank to bank.