Murabaha

Murabaḥah, murabaḥa, or murâbaḥah was originally a term of fiqh for a sales contract where the buyer and seller agree on the markup or "cost-plus" price for the item being sold. In recent decades it has become a term for a very common form of Islamic financing, where the price is marked up in exchange for allowing the buyer to pay over time—for example with monthly payments. Murabaha financing is basically the same as a rent-to-own arrangement in the non-Muslim world, with the intermediary retaining ownership of the item being sold until the loan is paid in full. There are also Islamic investment funds and sukuk that use murabahah contracts.
The purpose of murabaha is to finance a purchase without involving interest payments, which most Muslims consider riba and thus haram. Murabaha has come to be "the most prevalent" or "default" type of Islamic finance.
A proper murâbaḥah transaction differs from conventional interest-charging loans in several ways. The buyer/borrower pays the seller/lender at an agreed-upon higher price; instead of interest charges, the seller/lender makes a religiously permissible "profit on the sale of goods". The seller/financer must take actual possession of the good before selling it to the customer, and must assume "any liability from delivering defective goods". Sources differ as to whether the seller is permitted to charge extra when payments are late, with some authors stating any late fees ought to be donated to charity, or not collected unless the buyer has "deliberately refused" to make a payment. For the rate of markup, murabaha contracts "may openly use" riba interest rates such as LIBOR "as a benchmark", a practice approved of by the scholar Taqi Usmani.
Conservative scholars promoting Islamic finance consider murabaha to be a "transitory step" towards a "true profit-and-loss-sharing mode of financing", and a "weak" or "permissible but undesirable" form of finance to be used where profit-and-loss-sharing is "not practicable." Critics/skeptics complain/note that in practice most "murabaḥah" transactions are merely cash-flows between banks, brokers, and borrowers, with no buying or selling of commodities; that the profit or markup is based on the prevailing interest rate used in haram lending by the non-Muslim world; that "the financial outlook" of Islamic murabaha financing and conventional debt/loan financing is "the same", as is most everything else besides the terminology used.

Religious justification

While orthodox Islamic scholars have expressed a lack of enthusiasm for murabaha transactions, calling them "no more than a second best solution" or a "borderline transaction", nonetheless they are defended as Islamically permitted.
According to Taqi Usmani, the reference to permitted "trade" or "trafficking" in Quran verse 2:275:
refers to credit sales such as murabaha, the "forbidden usury" refers to charging extra for late payment, and the "they" refers to non-Muslims who didn't understand why if one was allowed both were not:

the objection of the infidels... was that when they increase the price at the initial stage of sale, it has not been held as prohibited but when the purchaser fails to pay on the due date, and they claim an additional amount for giving him more time, it is termed as "riba" and haram. The Holy Qur'an answered this objection by saying: "Allah has allowed sale and forbidden riba."

Usmani states that while it may appear to some people that allowing a buyer more time to pay for some product/commodity in exchange for their paying a higher price is effectively the same as paying interest on a loan, this is incorrect. In fact, just as a buyer may pay more for a product/commodity when the seller has a cleaner shop or more courteous staff, so too the buyer may pay more when given more time to complete payment for that product or commodity. When this happens, the extra they pay is not riba but just "an ancillary factor to determining the price". In such a case, according to Usmani, the "price is against a commodity and not against money" — and so permitted in Islam. When a credit transaction is made without the purchase of a specific commodity or product,, the added charge for deferred payment is for "nothing but time", and so is forbidden riba. However according to another Islamic finance promoter—Faleel Jamaldeen -- "murabaha payments represent debt" and because of that are not "negotiable or tradable" as Islamic finance instruments, making them unpopular among investors.
Hadith also supports use of credit-sales transactions such as murabaḥa. Another scholar, M.O.Farooq, states "it is well-known and supported by many hadiths that the Prophet had entered into credit-purchase transactions and also that he paid more than the original amount" in his repayment.
Usmani states that "this position" is accepted "unanimously" by the "four schools" of Islamic law and "the majority" of the Muslim jurists. Murabahah and related fixed financing has been approved by a number of government reports in the Islamic Republic of Pakistan on how to eliminate Interest.
;Late payment
Usmani presents a theory of why sellers are allowed to charge for providing credit to the lender/buyer, but are guilty of riba when charging for late payment. In a true murâbaḥah transaction "the whole price... is against a commodity and not against money" and so "... once the price is fixed, it relates to the commodity, and not to the time". Consequently "the price will remain the same and can never be increased by the seller." If the price had "been against time", "it might have been increased, if the seller allows... more time" for repayment when the bill is past due.

Islamic finance, use, variations

;Limits of use in fiqh
In its 1980 Report on the Elimination of Interest from the Economy, the Council of Islamic Ideology of Pakistan stated that murabahah should

be undertaken only when the borrower wants to borrow to purchase a some item
must involve
*the item being purchased by the bank;
*coming under the ownership and possession of the bank;
*which must assume the risk for that item;
the item then being sold to the customer through a valid sale;
be used to the "minimum extent" and
only in cases where profit and loss sharing is not practicable.

Murâbaḥah is one of three types of bayu-al-amanah, requiring an "honest declaration of cost".
According to Taqi Usmani "in exceptional cases" an Islamic bank or financial institution may lend cash to the customer for a murâbaḥah, but this is when the customer is acting as an agent of the bank in buying the good the customer needs financed.

here direct purchase from the supplier is not practicable for some reason, it is also allowed that he makes the customer himself his agent to buy the commodity on his behalf. In this case the client first purchases the commodity on behalf of his financier and takes its possession as such. Thereafter, he purchases the commodity from the financier for a deferred price.

The idea that the seller may not use murâbaḥah if profit-sharing modes of financing such as mudarabah or musharakah are practicable, is supported by other scholars that those in the Council of Islamic Ideology.
;Limits of use in practice
But these involve risks of loss, profit-sharing modes of financing cannot guarantee banks income. Murabahah, with its fixed margin, offers the seller a more predictable income stream. One estimate is that 80% of Islamic lending is by murabahah. M. Kabir Hassan reports that murabaha accounts are quite profitable. As of 2005, "the average cost efficiency" for murabaha was "74%, whereas average profit efficiency" even higher at 84%. Hassan states, "although Islamic banks are less efficient in containing cost, they are generally efficient in generating profit."
Islamic banker and author Harris Irfan writes that use of murabaha "has become so distorted from its original intent that it has become the single most common method of funding inter-bank liquidity and corporate loans in the Islamic finance industry." A number of economists have noted the dominance of murabahah in Islamic finance, despite its theological inferiority to profit and loss sharing. One scholar has coined the term "the murabaha syndrome" to describe this.
The accounting treatment of murâbaḥah, and its disclosure and presentation in financial statements, vary from bank to bank. If the exact cost of the item cannot be or are not ascertained, they are sold on the basis of musawamah. Different banks use this instrument in varying ratios. Typically, banks use murabaha in asset financing, property, microfinance and commodity import-export.
The International Monetary Fund reports that, Murâbaḥah transactions are "widely used to finance international trade, as well as for interbank financing and liquidity management through a multistep transaction known as tawarruq, often using commodities traded on the London Metal Exchange".
The basic murabaha transaction is a cost-plus-profit purchase where the item the bank purchases is something the customer wants but does not have cash at the time to buy directly. However, there are other murabaha transactions where the customer wants/needs cash and the product/commodity the bank buys is a means to an end.

Variations

In addition to being used by Islamic banks, murabahah contracts have been used by Islamic investment funds, and sukuk.

''Bay' bithaman 'ajil''

. Reportedly the most popular mode of Islamic financing is cost-plus murabaha in a credit sale setting with "an added binding promise on the customer to purchase the property, thus replicating secured lending in `Shari'a compliant` manner." The concept was developed by Sami Humud, and shortly after it became popular Islamic Banking began its strong growth in the late 1970s.
Another source distinguishes between Murabahah and Bay' bithaman 'ajil banking products, saying that in BBA disclosure of the cost price of the item being financed is not a condition of the contract.
One variation on murabahah allows the customer to serve as the "agent" of the bank, so that the customer buys the product using the bank's borrowed funds. The customer then repays the bank similar to a cash loan. While this is not "preferable" from a Sharia point of view, it avoids extra cost and the problem of a financial institution lacking the expertise to identify the exact or best product or the ability to negotiate a good price.