Why murabaha fails more often than other contracts
Murabaha looks simple: the bank buys an asset and resells it to the client at a higher price. In practice this is exactly where Shariah compliance is most often lost — because of details that play no part in an ordinary loan agreement.
1. Genuine ownership of the asset
The bank must acquire title to the asset before reselling it. A sale of something the seller does not yet own is void. In practice this means a separate supply contract, an acceptance certificate and confirmation that title has passed.
2. Cost disclosure
Murabaha is a sale at a disclosed mark-up. The buyer must see the cost and the size of the mark-up. A hidden mark-up turns the contract into an ordinary sale at an indeterminate price.
3. The moment risk passes
While the asset is with the bank, the bank bears the risk of loss and damage. If the contract shifts that risk onto the client from the moment of the order, the bank's economic function disappears — what remains is financing at interest.
4. Late payment without penalty income
The murabaha price is fixed and is not revised. Compensation for late payment is permissible, but it cannot become income of the bank: the usual practice is to direct such sums to charity.
5. The ban on repricing
Any linking of the price to the term or to a rate brings us back to riba. Even a "technical" indexation in a schedule to the contract makes the transaction non-compliant.
Check your contract against these five points before you send it to the Shariah board.