Question:
Can you explain what Halal financing through a Murabaha agreement is, and how it differs from conventional financing?
Answer :
Murabaha is one of the most straightforward contracts in the Islamic finance industry.
Simply put, it is a cost-plus-profit sale.
But it must meet several key conditions (cornerstones):
1. Ownership:
The financial institution (in this case, an Islamic bank) must first purchase the house. It must go into their possession, and they become responsible for it during that time. This concept is known in Islamic law as “Dhaman”, meaning they are fully liable for any issues with the property before it is sold to the customer.
This is a fundamental distinction from conventional mortgages, where no such ownership transfer occurs—only a loan is issued.
2. Transparency (Buyu’ al-Amana):
The cost of the house must be stated explicitly in the contract, in dollar value. The profit that the Islamic bank earns on the sale must also be explicitly stated in the contract.
This ensures the customer knows exactly what they’re paying for—with no hidden margins or secondary profit-taking. The bank cannot double-dip by profiting both from the house and the financing terms.
3. One-time Fixed Profit:
The bank adds its total profit upfront for the entire term (e.g., 25 years), and this is reflected in a single amortized payment structure.
The house is then sold to the customer at that fixed price, including both the original purchase cost and the clearly defined profit.
In contrast, conventional financing gives you the money as a loan (not the house), and you go and purchase it yourself, repaying the loan with interest over time.