Banking
Murabaha
An Islamic finance sale at cost plus an agreed profit, usually paid in instalments.
Last reviewedWhat does Murabaha mean?
Murabaha is a cost-plus sale used in Islamic banking in place of an interest-bearing loan, because Islamic law (Sharia) prohibits interest (riba). The bank buys the asset the customer wants, then sells it to the customer at the purchase price plus a disclosed, fixed profit, and the customer pays over time. Example: the bank buys a car for 20,000 and sells it to the customer for 23,000, paid over three years. The cash flows resemble a fixed-rate loan, but legally it is a sale that earns a trading profit, so the bank must own the asset and bear its risk, at least briefly, before selling it, and cannot add to the agreed price if the customer pays late. Standards for these contracts are set by AAOIFI, the Accounting and Auditing Organization for Islamic Financial Institutions.
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Related terms
- IjaraAn Islamic finance lease: the bank owns the asset and rents it to the customer.
- SukukIslamic certificates that give investors a share in assets, used in place of bonds.
- TakafulIslamic insurance built on mutual help, where members share each other's losses.
- Net interest margin (NIM)What a bank earns on its loans and investments after paying for its funding, as a share of those assets.
- Cost-to-income ratioOperating costs as a share of operating income. Lower means a more efficient bank.
- Cost of riskLoan loss charges as a share of loans, usually quoted in basis points.
- Non-performing loan (NPL) ratioThe share of a bank's loans that borrowers have stopped paying.
- CET1 capital ratio (and risk-weighted assets)A bank's highest-quality capital as a share of its risk-weighted assets.