The term "Islamic finance" refers to the financing
system that follows Shariah. Compliance with
Shariah is different from the traditional debt-financing
systems that exist in the Western banking system. According to the
Shariah rules, business transactions cannot involve
Riba (excess or increase, interest), Gharar
(uncertainty), Maisir (speculation), and Qimar
(gambling). While Quran prohibits application of Riba it
does not mean that Shariah prohibits making profit. It
scrutinizes the basis on which the profit is made, with the
rationale that charging interest is harmful for the borrower while
financiers would enjoy profits without spending any efforts of
their own. These barriers led Islamic institutions and scholars to
establish Shariah compliant finance techniques.1 Among of all Islamic financing
options, Murabaha is the most commonly used one. Today,
90% of Islamic banking transactions are done using
The root of the word "Murabaha" comes from
Arabic language, meaning "sale". In today's world,
Murabaha has become the most popular financing technique amongst
"Islamic" banks. It is that 90 percent of financial
operations are made by using this technique. Then the question
arises: If murabaha only means "sale" in Arabic, what
makes it this much popular as a financing method? Islamic banks,
using Murabaha, provide their customers with financing by
buying goods that their customers need, and then selling in return
to their customers on a deferred payments basis. Therefore, it is
being defined as "cost + financing".
The following example sets clear understanding on how Murabaha
Buyer A approaches Bank B to finance his purchase of a flat
having a price of $100,000 from a third party seller C who only
accepts cash payment. Bank B purchases the house from the seller
for $100,000 and then sells it to Buyer A for $110,000 which is to
be paid by A in instalments over the next one year.
In a conventional Western banking system, the client who is in
need of the price of the asset he wishes to purchase usually
applies to the bank for borrowing such amount and pays the interest
to the bank in return for the loan he receives. This method
is against the Shariah. In the foregoing example, if Buyer A is
delinquent on payments, then the amount that he/she owes is fixed
and does not increase by interest being added up on the same.
Therefore it can be concluded that Murabaha is actually
just a sale transaction, where the bank buys an asset for a value
on the demand of a third party and sells it for an increased price.
Therefore, following conditions of sale apply to Murabaha
if one wishes to analyse its compliance with Shariah.
The subject of sale must exist at the
time of sale.
The seller must be the owner of the
subject at the time of the second sale.
The subject of sale must be in
physical or constructive possession of the seller.
The sale must have to be agreed and
finalised on that place and time.
The subject of sale must have a
The subject of sale must be used for
a Halal3 purpose.
The subject of sale must specifically
be identified and known to the buyer.
Delivery of the sold subject to the
buyer must be certain and not depend on a probability or an
The price must be definite for the
validity of a sale.
The sale must be unconditional. A
conditional sale is invalid, unless the condition is recognized as
a part of the transaction due to the commercial usage purposes.4
Even if there are some discussions about the compliance to the
Shariah while having Murabaha transactions since the
nature of Murabaha requires the Islamic bank to add some amount to
the cost and this amount may be equivalent to interest rates of
that date, Murabaha is still the most common Islamic financing
technique. Leaving the theoretical discussions to scholars, it
would be fair to say that in terms of efficiency, Murabaha is a
simple and efficient financing tool for the people who do not
utilize western banking tools simply because interest is
 Zuvin S., Akgun M.,
Toprak U. "Islamic Financial Leasing (Sukuk Al-Ijarah)
Implementations In Aircraft Financing". available on www.mondaq.com
Under Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories ("EMIR")...
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