Murabaha

A cost-plus sale. The seller purchases an asset and resells it to the buyer at a disclosed, agreed-upon markup. The buyer pays the total amount in installments.

The price, markup amount, and payment schedule are fixed and transparent at the time of the contract — the buyer knows exactly what they are paying and why. The key difference from a conventional loan is that the financier takes actual ownership of the asset (however briefly) before selling it, creating a genuine sale transaction rather than a debt relationship. Commonly used for home financing, auto financing, business equipment purchases, and commodity financing.

Murabaha is the cost-plus sale — the workhorse of Islamic finance, governed by AAOIFI Shariah Standard No. 8. The financier buys an asset, discloses its cost, and resells it to you at cost plus a stated markup, payable in installments. The markup is profit on a real sale, not interest on a loan, and the distinction has teeth: the financier must actually acquire and own the asset (bearing risk, however briefly) before reselling; the price, once fixed, can never increase — no compounding, no penalty interest on late payment (boards permit only charity-donated late fees to deter abuse); and early payoff discounts are discretionary rather than contractual in the classical rule.

In the U.S., Murabaha finances homes (UIF and Devon Bank use it in many states), vehicles, equipment, and business inventory; globally, 'commodity Murabaha' variants dominate Islamic bank balance sheets. The honest criticisms: benchmarking markups to interest indices makes the economics track conventional loans, and rapid back-to-back title transfers can make ownership feel ceremonial — which is why scrutiny focuses on whether the provider genuinely takes title and bears risk in sequence. Bank-regulatory accommodation matters too: the OCC approved Murabaha home financing structures for U.S. banks in interpretive letters during the late 1990s, which is why FDIC-insured institutions can offer it.

The fixed-price feature is Murabaha's underrated consumer benefit: your obligation is known to the dollar on day one and structurally cannot balloon.