Short answer
Murabaha is a sale at cost plus an agreed profit, with the cost told to the buyer. It is halal. Islamic banks use it for car, home and business finance: the bank buys the item, owns it, then sells it to you at a higher price paid in installments. It is valid only if the bank really owns the item before selling it and the price is fixed.
Murabaha is a valid sale when the original cost is disclosed, the profit is known, and the seller owns and possesses the item before selling. A deferred price may be higher than the cash price, but once agreed it cannot rise for late payment. Selling the item back to its original seller to raise cash ('inah) is not allowed.
The four schools agree on this.
Explanation
In a classical murabaha, a trader says, "I bought this for 100 and I will sell it to you for 110." Honesty about the cost is the heart of the contract; if the seller lies about it, Hanafi jurists give the buyer the right to cancel. Modern banks add deferred payment, which is allowed: a seller may charge more for paying later, as long as the price is fixed at the start. See Can a seller charge more for installments?
How bank murabaha should work:
- You ask the bank to buy a car or goods and promise to buy them from it.
- The bank buys the item from the supplier and takes ownership and risk, itself or through an agent.
- The bank sells it to you at cost plus profit, payable in installments.
What a scholar checks:
- The bank owned the item, even briefly, before selling it. Signing the sale before the bank buys it is selling what you do not have.
- The price does not change after the sale. Late payers may pledge a sum to charity, but the bank may not profit from the delay.
- The item is not bought from you and sold back to you at a higher price, which is 'inah, a disguised loan.
- Using an interest rate only as a benchmark for setting the profit is accepted by Mufti Taqi Usmani and most Islamic finance scholars, though they prefer independent benchmarks.
Murabaha differs from a loan because the bank sells a real asset and carries its risk while it owns it. That is the difference between trade and riba stated in 2:275. See also Are Islamic banks really halal? and Is car finance haram? The four schools accept murabaha in principle.
The evidence
Quran, Surah Al-Baqara 2:275
ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَٰٓئِكَ أَصْحَٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَٰلِدُونَ ﴿٢٧٥﴾
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.
A sale at a profit, even on credit, is trade.
Jami' at-Tirmidhi 1234
Graded hasan sahih... ولا ربح ما لم يضمن ولا بيع ما ليس عندك ...
"Nor profit on what is not in your liability, nor selling what you do not have."
The bank must own the item and carry its risk before selling it.
Where the ruling is recorded
- al-Hidaya, Kitab al-Buyu', Bab al-Murabaha wa al-Tawliya. Disclosure of cost and the buyer's right when it is misstated.
- AAOIFI Shari'ah Standards, Standard on murabahah to the purchase orderer. Steps and conditions for bank murabaha.
- Mufti Taqi Usmani, An Introduction to Islamic Finance, Chapter on murabahah. Rules and common errors in bank murabaha.
This answer is pending review by the scholars on our team. Quran translation by Sahih International. Hadith Arabic from the standard editions of the six books and the Muwatta, with gradings as recorded there; the English is our own rendering. Spotted a mistake? Tell us.