Murabaḥah, murabaḥa, or murâbaḥah (Arabic: مرابحة, derived from ribh Arabic: ربح, meaning profit) was originally a term of fiqh (Islamic jurisprudence) for a sales contract where the buyer and seller agree on the markup (profit) or "cost-plus" price[1] for the item(s) being sold.[2] In recent decades it has become a term for a very common form of Islamic (i.e., "shariah compliant") financing, where the price is marked up in exchange for allowing the buyer to pay over time—for example with monthly payments (a contract with deferred payment being known as bai-muajjal). Murabaha financing is similar to a rent-to-own arrangement in the non-Muslim world, with the intermediary (e.g., the lending bank) retaining ownership of the item being sold until the loan is paid in full.[3] There are also Islamic investment funds and sukuk (Islamic bonds) that use murabahah contracts.[4]
The purpose of murabaha is to finance a purchase without involving interest payments, which most Muslims (particularly most scholars) consider riba (usury) and thus haram (forbidden). Murabaha has come to be "the most prevalent" or "default" type of Islamic finance.[5]
A proper murâbaḥah transaction differs from conventional interest-charging loans in several ways. The buyer/borrower pays the seller/lender at an agreed-upon higher price; instead of interest charges, the seller/lender makes a religiously permissible "profit on the sale of goods".[6] [7] The seller/financer must take actual possession of the good before selling it to the customer, and must assume "any liability from delivering defective goods". Sources differ as to whether the seller is permitted to charge extra when payments are late,[8] with some authors stating any late fees ought to be donated to charity,[9] [10] [11] or not collected unless the buyer has "deliberately refused" to make a payment. For the rate of markup, murabaha contracts "may openly use" riba interest rates such as LIBOR "as a benchmark", a practice approved of by the scholar Taqi Usmani.[12]
Conservative scholars promoting Islamic finance consider murabaha to be a "transitory step" towards a "true profit-and-loss-sharing mode of financing", and a "weak"[13] or "permissible but undesirable"[14] form of finance to be used where profit-and-loss-sharing is "not practicable."[15] [16] Critics/skeptics complain/note that in practice most "murabaḥah" transactions are merely cash-flows between banks, brokers, and borrowers, with no buying or selling of commodities; that the profit or markup is based on the prevailing interest rate used in haram lending by the non-Muslim world;[17] that "the financial outlook" of Islamic murabaha financing and conventional debt/loan financing is "the same",[18] as is most everything else besides the terminology used.
While orthodox Islamic scholars have expressed a lack of enthusiasm for murabaha transactions,[19] calling them "no more than a second best solution" (Council of Islamic Ideology) or a "borderline transaction" (Islamic scholar Taqi Usmani),[20] nonetheless they are defended as Islamically permitted.
According to Taqi Usmani, the reference to permitted "trade" or "trafficking" in Quran aya 2:275:[21]
refers to credit sales such as murabaha, the "forbidden usury" refers to charging extra for late payment (late fees), and the "they" refers to non-Muslims who didn't understand why if one was allowed both were not:[22]
the objection of the infidels ... was that when they increase the price at the initial stage of sale, it has not been held as prohibited but when the purchaser fails to pay on the due date, and they claim an additional amount for giving him more time, it is termed as "riba" and haram. The Holy Qur'an answered this objection by saying: "Allah has allowed sale and forbidden riba."[23]
Usmani states that while it may appear to some people that allowing a buyer more time to pay for some product/commodity (deferred payment) in exchange for their paying a higher price is effectively the same as paying interest on a loan,[24] this is incorrect. In fact, just as a buyer may pay more for a product/commodity when the seller has a cleaner shop or more courteous staff, so too the buyer may pay more when given more time to complete payment for that product or commodity. When this happens, the extra they pay is not riba but just "an ancillary factor to determining the price". In such a case, according to Usmani, the "price is against a commodity and not against money" — and so permitted in Islam. When a credit transaction is made without the purchase of a specific commodity or product, (i.e. a loan is made charging interest), the added charge for deferred payment is for "nothing but time", and so is forbidden riba.[25] However according to another Islamic finance promoter—Faleel Jamaldeen -- "murabaha payments represent debt" and because of that are not "negotiable or tradable" as Islamic finance instruments, making them (according to Jamaldeen) unpopular among investors.[26]
Hadith also supports use of credit-sales transactions such as murabaḥa. Another scholar, M.O.Farooq, states "it is well-known and supported by many hadiths that the Prophet had entered into credit-purchase transactions (nasi'ah) and also that he paid more than the original amount" in his repayment.[27]