Mourabaha financing offers an ethical, asset-backed alternative to interest-based loans. In this article we explain how Mourabaha works, how it compares to conventional credit, and practical examples for individuals and businesses.
What is Mourabaha?
Mourabaha is a form of trade-based financing in which a financial institution buys an asset and then sells it to the client at a disclosed markup. The buyer repays the agreed price over time. The key difference is transparency: the bank discloses its cost and agreed profit margin.
How conventional credit works
Conventional loans charge interest (riba) on the principal amount. Interest is a price for borrowing money and usually accrues over time, independent of the success of the underlying activity.
Key differences
- Risk allocation: Mourabaha links the transaction to an asset and a trade, while conventional credit places repayment responsibility principally on the borrower.
- Transparency: Mourabaha requires disclosure of cost + markup; traditional loans do not disclose lender margins in the same way.
- Ethical framing: Mourabaha is often used where avoidance of interest is required for religious or ethical reasons.
Real-world example
A family wants to buy a home. Under Mourabaha the bank purchases the property and resells it to the family at the agreed price, payable in installments. The transaction is asset-backed and the markup is established upfront.
Takeaway
Mourabaha is a practical, transparent alternative to interest-based lending and can be a good fit for investors and borrowers seeking ethical financing solutions.