Islamic Commercial Matters FAQ #

For some of their business activities, Islamic banks indeed use Murabahah.

This business practice frees them from the existence of usury (riba) which is prevalent in conventional banking practices.

For example, say a buyer wishes to buy a car that costs $50,000. If the buyer has sufficient money on hand, it is a straightforward process to purchase the car using his own money.

However, if the buyer does not have a sufficient amount on hand, they then need the bank’s assistance to finance and front the initial payment.Based on the Murabahah arrangement, the Islamic bank will first buy the car in question. At this point, the bank owns the full rights to the car.

The bank will then sell the car to the buyer at a marked-up price of (i.e., $60,000) with a fixed monthly instalment payment until the total sum is repaid.

From this particular example, the bank has made a profit of $10,000.

In fiqh terms, this is referred to as bai al-Murabahah lil amir bissyira’ (selling through Murabahah to the person who ordered the purchase).