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Murabaha
Practical Law Glossary Item 6-500-6961 (Approx. 3 pages)
Glossary
Murabaha
Also known as morabaha. An Islamic finance technique used to provide working capital, trade financing, and acquisition financing on terms compliant with Sharia. In a murabaha transaction, a financing party buys an asset that has been identified by its client (borrower) from a third-party and then sells that asset to the borrower for the original purchase price plus a profit element (generally calculated based on a benchmark figure such as LIBOR). The borrower pays the new higher purchase price in installments.
In this structure, the:
- Financing party does not make a loan but rather sells an asset at a mark-up.
- Profit element is specified and known in advance and is the difference between the price charged by the third-party supplier and the price the financing party charges for the asset.
- Borrower may pay the purchase in full, or more commonly, in installments.
Murabaha transactions are in compliance with Sharia because until the asset is sold (however immediately) to the buyer, the financing party bears the risks associated with the ownership of the asset.
For more information on murabaha transactions and Islamic finance in the US, see Practice Notes:
For more information on murabaha transactions and Islamic finance in the UK, see Practice notes: