what is Murabaha

Murabaha is a widely used Islamic finance mechanism that involves the sale of goods at a markup price, allowing buyers to acquire assets without taking on interest-bearing loans. This Sharia-compliant financing method is structured to adhere to Islamic laws that prohibit the charging of interest. Here are four key points to understand Murabaha:

You can read more about the different types of financing structures here.

1. Process: In a Murabaha transaction, the financial institution purchases the asset requested by the customer and then sells it to the customer at a higher price, which includes a profit margin. This allows the buyer to make the purchase without taking an interest-based loan.
2. Markup Price: The markup price in a Murabaha transaction is agreed upon by both parties before the sale takes place. It is determined based on the cost of the asset, the profit margin, and any other relevant factors. This transparency is a key feature of Murabaha transactions.
3. Asset Ownership: Throughout the Murabaha transaction, the financial institution retains ownership of the asset until the buyer completes the payment. Once the buyer fulfills the payment obligations, the ownership of the asset is transferred to the buyer.
4. Applicability: Murabaha financing is commonly used for purchasing big-ticket items such as real estate (Halal Mortgages or Sharia Mortgages), Islamic Car Finanace (Cars & Trucks) and machinery (asset finance). It provides a Sharia-compliant alternative to traditional interest-based loans, making it a popular choice in Islamic finance.

Sources:

https://en.wikipedia.org/wiki/Murabaha

https://islamic-banking.com/murabaha

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