Fiqh al-Murabaha — Cost-Plus Sale in Islamic Law and Finance: The Transaction Structure Behind Most Islamic Home Finance Products

The Classical Murabaha

In classical Islamic commercial law, murabaha is simply a disclosed-profit sale: the seller says “I purchased this item for 100 dirhams and I wish to sell it to you for 120 dirhams.” The buyer knows the cost and the markup.

The conditions: (1) the seller must have owned the item before selling it; (2) the cost disclosure must be accurate; (3) the markup must be agreed.

This is distinguished from other sale types (musawama — bargaining without disclosure; tawliya — sale at cost) by its transparency obligation.

The Modern Murabaha Structure

The murabaha lil-amir bil-shira’ (murabaha at the ordering party’s instruction) is how classical murabaha was adapted for Islamic finance. Structure:

1. The customer identifies an asset (house, car, equipment) and approaches an Islamic bank
2. The bank purchases the asset from the seller — the bank takes title and bears the risk of ownership (even if briefly)
3. The bank then sells the asset to the customer at cost-plus-markup on deferred-payment terms
4. The customer pays in installments

The bank makes its return through the disclosed markup (not through interest). The key: the bank must genuinely own the asset — even briefly — before selling it. If the bank never took possession or ownership risk, the transaction collapses into disguised interest.

Scholarly Critique

Some Islamic scholars criticize modern murabaha implementations for being functionally indistinguishable from interest-based loans: the bank’s “ownership” is often nominal, the markup is benchmarked to LIBOR/SOFR, and no genuine risk is transferred. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has issued standards attempting to ensure genuine ownership transfer.

See also: Fiqh Al Musharakah, Fiqh Al Bay Al Salam, Fiqh Al Ghurm Wa Ghanm, Fiqh Al Ijarah, Fiqh Al Sukuk