How it works
The customer identifies the asset they want (a home, a vehicle, equipment). The financier purchases it. The financier then sells the asset to the customer at a price equal to original cost plus an agreed-upon markup. The customer pays in fixed installments over the term.
Title transfers to the customer at the second sale. Risk during the brief financier ownership period is real and material; the financier cannot pass that risk back to the customer (which would collapse the structure into a disguised loan).
The conditions for permissibility
Cost must be disclosed. The customer must know what the financier paid for the asset before agreeing to the markup. This transparency is not a courtesy; it is a structural requirement.
The markup must be fixed at signing. It cannot float with a conventional rate index. AAOIFI Sharia Standard 8 governs Murabahah; standards 9 and 12 govern related arrangements.
The financier must take real ownership and bear real risk during the holding period, however brief. Constructive ownership through documents alone is insufficient.
Where Murabahah shows up
Home financing: Devon Bank's home Murabahah, alongside Diminishing Musharakah and Ijara products from other providers. Auto financing: most halal auto products in the US are Murabahah-structured. Business: equipment and inventory purchases at cost-plus-markup terms.
The critique to know
Some scholars view commodity Murabahah (a Murabahah-on-a-commodity used purely for liquidity, where the customer immediately resells the commodity) as hiyal, a legal device circumventing the riba prohibition rather than honoring it. Mufti review on individual products examines whether the Murabahah is a real asset transaction or a paper structure.