Murabaha is a cost-plus sale transaction in Islamic finance where the seller explicitly discloses the cost of acquiring an asset and adds an agreed-upon profit margin. The buyer knows both the cost and the markup, making the transaction transparent. This structure is widely used in Islamic banking as an alternative to interest-bearing loans.
In practice, a Murabaha transaction typically works as follows: a customer identifies an asset they wish to purchase (such as a car or equipment). The bank purchases the asset from the supplier and then sells it to the customer at the original cost plus a disclosed profit margin. The customer may pay in installments, but the total price is fixed at the time of sale — there is no additional charge for late payment as there would be with interest.
While Murabaha is the most common Islamic financing structure globally, scholars have noted the importance of ensuring it is not merely a repackaging of interest-based lending. The key requirements are that the bank must actually take ownership and risk of the asset (even briefly), the cost and profit must be transparently disclosed, and the arrangement must involve a genuine sale rather than a disguised loan.