UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Murabahah in Islamic Finance




Personal Financing: A bank may give the borrower cash for personal consumption or to buy an asset.  In this case, a bank credits the customer’s bank account with the cash. 

Asset Financing: A bank may facilitate a customer to purchase an asset by offering alternative payment plans such as installments or deferred lump sum payment.  The Islamic Bank actually delivers the asset to the customer. 

While asset financing enables the customer to own a particular asset, personal financing enables the customer to obtain cash for his consumption including the purchase of an asset.  (AMANIE)


‘Murabahah or murabaha (Arabic مرابحة, more accurately transliterated as murābahah) is a particular kind of sale, compliant with shariah, where the seller expressly mentions the cost he has incurred on the commodities for sale and sells it to another person by adding some profit or mark-up thereon which is known to the buyer. As the requirement includes an “honest declaration of cost,” murabahah is one of three types of bayu-al-amanah (fiduciary sale). The other two types of bayu-al-amanah are tawliyah (sale at cost) and wadiah (sale at specified loss).

It is one of the most popular modes used by banks in Islamic countries to promote riba-free transactions. Different banks use this instrument in varying ratios. Typically, banks use murabahah in asset financing, property, microfinance and commodity import-export.[1]

The seller may not use murabahah if mudarabah or musharakah are practicable. Since those profit-sharing modes of financing involve risks, they cannot guarantee banks any income. Murabahah, with its fixed margin, offers the seller (i.e. the bank) a more predictable income stream. A profit-sharing instrument, conversely, is preferable as it shares the risks more equitably between seller and buyer.

There are, however, practical guidelines in place which aim to ensure that the murabahah transaction between the bank and the customer is one based on trade and not merely a financing transaction. For instance, the bank must take constructive or actual possession of the good before selling it to the customer. Whilst it can be justified to charge an additional margin to the customer to reflect the time value of money in terms of actual payment not being received from the customer at time zero, the bank can only impose penalties for late payment by agreeing to purify them by donating them to charity.’

Commodity Murabahah

‘Under a Commodity Murabaha financing or Tawarooq, a Bank purchases and takes title to the relevant assets (usually precious metals such as Palladium) from a third party broker. The Bank then sells the assets to the Borrower at cost plus a specified profit. Payment of the sale price is usually deferred and may be structured in accordance with the wishes of the parties. The Borrower will enter into a contract to sell the assets to the Broker for the cost price. The net result is to create a deferred payment obligation from the Borrower to the Bank. Bank and Customer will usually enter into a succession of such transactions to create monthly, quarterly or semi-annual payment obligations.

The Commodity Murabaha has been criticised by Islamic Scholars who say it should only be used as a structure of last resort where no other structure is available. In most transactions the commodities never change hands and usually there are no commodities at all, merely cashflows between banks, brokers and borrowers. Often the commodity is completely irrelevant to the Borrower’s business and there is not even enough of the relevant commodities in existence in the world to account for all the transactions taking place.[2]

I.E., Under this structure, the surplus bank may initially purchase an asset from LME at USD 10 Million (or equivalent to the amount that the deficit bank is in need of).  Next, the surplus bank will sell the asset to the deficit bank at USD 10.5 million which is payable in one week (equivalent to the period of investment).  Upon the acquisition of the asset by the deficit bank, the deficit bank may sell the asset to the market/LME for USD 10 million cash.  This USD 10 million is essentially intended for money market purposes.  (AMANIE)

Murabahah v Lending on Interest


Murabahah Presentation,Salam%20&%20Istisna%20)/Murabaha%20-%20Process,%20Documentation%20&%20Practical%20Issues%20by%20Ahme.pdf

Murabahah as A Mode of Finance


Murabahah Explained

Sharia’h Parameters Murabahah

Fatwa on Murabahah

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UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

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