murabaha

(cost-plus financing)

murabaha arrangements are commodity trading arrangements for financial institutions. The financial institution buys an asset from a supplier and then sells it to a customer at an agreed price that is higher than the purchase price. The sale price is fixed earlier between the financial institution and the customer and may be payable immediately or may be deferred for payment at a later date. The arrangement is not contrary to Sharia because by taking the title to the asset, the financial institution takes on a risk and is therefore entitled to a profit.

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Islamic finance

+ murabaha

International, USA

An Islamic finance technique used to provide working capital, trade financing and acquisition financing on terms compliant with Sharia. In a murabaha transaction, a lender buys an asset that has been identified by its client (the borrower) from a third party and then sells that asset to the borrower for the original purchase price plus a profit element (generally calculated based on a benchmark figure such as LIBOR). The borrower pays the new higher purchase price in installments.

In this structure, the:

• Lender does not make a loan but rather sells an asset at a mark-up.

• Profit element is specified and known in advance and is the difference between the price charged by the third party supplier and the price the lender charges for the asset.

• Borrower may pay the purchase in full, or more commonly, in installments.

Murabaha is the Islamic finance technique used most often in the US.