A murabaha transaction enables a bank to finance the purchase of an asset by a customer without making an interest bearing loan.
Posted 20 January 2017
Murabaha is the simplest transaction used in Islamic finance, and is very common. It is best explained with a diagram.
In this scenario, Customer wishes to purchase a machine. The open market price of the machine is $1,000 and if Customer had the available funds, it would purchase the machine from Machine Supplier for $1,000.
However Customer does not have the $1,000 required. Accordingly, it approaches Bank for finance.
Bank is willing to provide $1,000 to Customer for two years, but wishes to earn a fixed return of $500 from the transaction. Accordingly, it informs Customer that, if the Customer agrees, the following transactions will be carried out:
This above transaction allows Bank to provide finance to Customer for the purchase of the asset without there being any interest bearing loan.
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