What is Murabaha?
An Islamic cost-plus financing structure where the bank resells an asset to you at a transparent profit margin.
In Murabaha, the bank buys the asset and sells it to you at a disclosed markup, paid in fixed installments — no interest. It's common for home and asset finance in Islamic banking.
Example
Asset 2,500,000 + 20% margin, repaid over 15 years in fixed installments.
How Murabaha works
Murabaha is a cost-plus sale used as an Islamic alternative to an interest loan. The bank buys the asset you want and sells it to you at a price that includes a disclosed, agreed profit margin, which you repay in fixed instalments. Because the profit is fixed and transparent at the outset — not interest accruing on a balance — the structure is Sharia-compliant.
Where it's used
Murabaha is common for home, car and trade finance. Your total cost is known from day one and does not change with market rates, which some borrowers prefer for its certainty; the trade-off is less flexibility than a conventional variable-rate loan.
How regulators define it: the Bahrain rulebook example
The Central Bank of Bahrain's Rulebook Volume 2 (Islamic Banks) — one of the region's formal Islamic-banking regulatory texts — defines Murabaha simply as the "sale of goods with an agreed upon profit mark-up on the cost." It describes two structures banks actually use: an inventory model, where the bank buys goods and offers them for sale without a prior customer commitment, and the far more common order-to-purchase model, where the bank buys the specific goods a customer has requested from a third-party supplier and only then sells them on to that same customer, after the customer's purchase promise. That two-step, sale-based structure — not simply lending cash — is what makes it a sale contract rather than a loan.
Common mistake: assuming the bank can sell before it owns the asset
A frequent misunderstanding is that Murabaha is just an interest loan relabelled as a "markup." The requirement that keeps it a genuine sale is that the bank must first actually acquire (take possession of and bear the risk on) the asset before it sells it on to the customer — it cannot sell something it doesn't yet own or hasn't taken delivery of. As a result, the seller in a Murabaha also assumes liability for defects in the goods delivered, in the same way an ordinary seller would, which is not something a pure interest-based lender takes on.
A second example: a shorter tenure, same markup
Compare the existing example — an asset worth 2,500,000 with a 20% margin repaid over 15 years — against the same asset repaid over 5 years instead. The total price is fixed either way at 2,500,000 × 1.20 = 3,000,000, so shortening the tenure from 15 to 5 years doesn't change the total cost; it only changes the size of each fixed instalment, from 3,000,000 ÷ 180 months ≈ 16,667 per month down to 3,000,000 ÷ 60 months = 50,000 per month. This is a key structural difference from an interest-based loan: because the profit is fixed and disclosed up front rather than accruing on an outstanding balance, choosing a shorter Murabaha term doesn't reduce total cost the way paying off a conventional loan faster reduces total interest.
How Murabaha relates to Ijarah
Murabaha and Ijarah are the two most widely used Islamic financing structures for buying a home, car or other asset. Murabaha is a sale: the bank buys the asset and resells it to you at a disclosed markup, and you own it (subject to the payment plan) from the start. Ijarah is a lease: the bank keeps ownership and you pay rent, with title transferring only at the end in the lease-to-own variant. Which one a bank offers for a given product depends on the bank and the asset class.
FAQ
Does a shorter Murabaha term reduce the total amount paid?
No. Because the bank's profit margin is fixed and disclosed at the start of the contract rather than accruing daily on a balance, the total price (cost plus markup) stays the same regardless of tenure — a shorter term only means larger monthly instalments, not a lower total cost.
Can a bank sell an asset via Murabaha before it owns it?
No — Shariah-compliance requires the bank to first take actual possession of, and assume risk on, the asset before reselling it to the customer. Selling something the bank does not yet own or hasn't taken delivery of would make the contract non-compliant.
Sources
- Murabaha — Central Bank of Bahrain Rulebook, Volume 2 (Islamic Banks) (accessed 26 September 2026)
- Murabaha — overview of Shariah-compliance requirements (accessed 26 September 2026)