Murabaha
Cost-plus sale arrangement used as an alternative to interest-based financing.
Detailed Description
Murabaha
What is Murabaha?
Murabaha is an Islamic financing structure involving the sale of goods at a profit margin agreed upon by both the buyer and seller, compliant with Shariah principles.
How does a typical Murabaha transaction work?
In a Murabaha transaction, a client requests financing, the institution purchases the asset, agrees on a profit margin, sells the asset to the client, and sets payment terms.
What are the key differences between Murabaha and conventional financing?
Murabaha relies on a profit margin instead of interest, requires asset ownership before sale, adheres to Shariah principles, and emphasizes transparency.
What are some benefits of Murabaha?
Benefits include Shariah compliance, predictability in repayments, improved access to financing, and encouragement of productive asset utilization.
What are the risks associated with Murabaha?
Risks include market risk, credit risk, legal and regulatory risks, and liquidity risk, impacting both clients and financial institutions.