Islamic FinanceFebruary 20, 2026 · 8 min read

Murabaha Explained: Islamic Cost-Plus Finance

Murabaha (from the Arabic for 'profit') is the most widely used financing structure in Islamic banking — estimated to account for 70-80% of all Islamic banking transactions globally.

What Is Murabaha?

Murabaha is a sale at cost plus an agreed profit margin. Instead of the bank lending you money to buy something (with interest), the bank buys the item directly and sells it to you at an agreed markup, allowing you to pay in installments. The markup is the bank's profit — not interest.

How Murabaha Works

Example: You want a $30,000 car. Under conventional finance, the bank lends you $30,000 at 6% interest and you make monthly payments including principal and interest. Under murabaha: the bank buys the car for $30,000, then sells it to you for $33,000 payable over 36 months (~$917/month). The bank's profit is $3,000 — a one-time sale markup, not interest.

Is the Markup Really Different from Interest?

Critics argue murabaha is "interest in disguise." Scholars defend the distinction: in murabaha, the profit is fixed at the time of sale and cannot increase if you're late (conventional interest accrues over time). The bank takes ownership risk — if the car is destroyed before delivery, the bank bears the loss. These structural differences matter in Islamic law.

Applications of Murabaha

  • Vehicle finance: Common Islamic car financing product
  • Home appliances and goods: Retail Islamic financing
  • Business asset purchases: Equipment and inventory financing
  • Commodity murabaha: Used for liquidity management in Islamic banking

Commodity Murabaha — Controversy

Tawarruq (reverse murabaha/commodity murabaha) is controversial — it involves buying a commodity, selling it spot, and paying back in installments. Critics argue this has no real commercial purpose and is structured to produce cash like a loan. Several scholars have criticized tawarruq as a legal fiction.

Bottom Line

Murabaha is the most practical Islamic alternative to conventional credit. It allows consumers and businesses to acquire assets without paying interest — through a genuine sale transaction rather than a loan.

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