Murabaha

Murabaḥah, murabaḥa or murâbaḥah (Arabic: مرابحة‎‎, derived from ribh Arabic: ربح‎‎, meaning profit) is a term of fiqh (Islamic jurisprudence) for a sale where the buyer and seller agree on the markup (profit) or "cost-plus" price for the item(s) being sold. In recent decades it has become a term for a very common form of Islamic (i.e. "shariah compliant") financing, where the price is marked-up in exchange for allowing the buyer to defer payment (a contract with deferred payment being known as bai-muajjal). Murabaha financing is similar to a rent-to-own arrangement in the non-Muslim world, with the intermediary (i.e. the lending bank) retaining ownership of the item being sold until the loan is paid in full.

The purpose of murabaha is to finance a purchase while not paying any interest, which most Muslims (particularly most scholars) consider riba (usury) and thus haram (forbidden).Murabaha has come to be "the most prevalent" or "default" type of Islamic finance.

A proper murâbaḥah transaction differs from conventional interest-charging loans in several ways. The buyer/borrower pays the seller/lender at an agreed upon higher price, instead of interest charges, but makes a religiously permissible "profit on the sale of goods". The seller/financer must take actual possession of the good before selling it to the customer; and must assume "any liability from delivering defective goods". Sources differ as to whether the seller is permitted to charge extra when payments are late, with some authors stating any late fees ought to be donated to charity, or not collected unless the buyer has "deliberately refused" to make a payment. For the rate of markup, murabaha contracts "may openly use" riba interest rates such as LIBOR, "as a benchmark", a practice approved of by no less a scholar than Taqi Usmani.

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Wikipedia