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Home / Accountant Library / Glossary / Islamic finance

Murabaha

In one sentenceThe sale of goods at a price equal to their cost to the seller plus a known, agreed profit, with the price usually paid in deferred installments.

Simply put

In Murabaha the seller openly discloses to the buyer the cost of the goods and the amount of his profit, so the buyer knows what the seller paid and how much he earned. It is used to finance goods, equipment and vehicles.

If you are the accountant of the business buying in installments, you record the asset at its cost, and the difference between the deferred price and the cost is a finance cost spread over the repayment period, not added to the asset's value.

Worked example

A spare parts store needs goods costing 100,000 SAR, so the bank bought them and then sold them to the store on Murabaha at a profit of 8% (an assumed rate for illustration), repaid in 12 monthly installments.

Cost of the goods to the bank100,000 SAR
Murabaha profit: 100,000 × 8%8,000 SAR
Deferred sale price: 100,000 + 8,000108,000 SAR
Monthly installment: 108,000 ÷ 129,000 SAR
Finance cost the store charges over 12 months8,000 SAR

Formula: Murabaha price = cost of goods + (cost of goods × agreed profit rate)

Don't confuse it with

TawarruqIn Murabaha you keep the goods and use them; in Tawarruq you sell them immediately to another party to obtain cash.