What is murabaha, and how does it work as an alternative to an interest-based loan?

Murabaha is a cost-plus sale used widely by Islamic banks as a substitute for interest-based financing. Instead of lending money and charging interest, the bank actually purchases the asset the customer wants — a car, equipment, or property — and then resells it to the customer at a disclosed, agreed-upon markup, payable in installments. Because the bank takes real (even if brief) ownership of the item and bears the associated risk before the sale, the transaction is structured as trade rather than a loan, which is what makes it permissible; trade with a disclosed profit margin is explicitly allowed, unlike a loan with a hidden or compounding interest charge. The price and profit margin are fixed at the outset and do not change over the repayment period, unlike variable-rate interest loans. Critics, including some scholars, note that in practice murabaha can resemble conventional lending if banks skip genuine ownership or risk, so the integrity of the transaction depends on real asset purchase and transfer, not just paperwork. Done properly, though, it is widely accepted as a legitimate halal financing tool across the major schools of Islamic finance.

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