Murabaha is a mode of financing based on the sale of a commodity for a deferred price. Put another way, it is the sale of commodities at cost plus an agreed mark-up (profit/ ribh). The seller is obliged to reveal to the purchaser (or a purchase orderer) the actual price at which the commodity is purchased. As such, the seller stipulates an amount of profit in addition to that price. The two parties to a contract of murabaha are a financier and a purchaser. The financier must own the commodity before it is resold to the purchaser. It is a shari’a condition that the underlying commodity is purchased from a third party to prevent any collusion or fictitious transactions.
On the other hand, tawarruq (Islamic monetization) is a sale transaction whereby a party buys an asset/ commodity from a seller on the basis of deferred payment, whether through a musawama or murabaha contract , and sells it to a third party on cash basis at a given price. The price can be equal to, or higher or lower than the original price.
The main differences between murabaha and tawarruq are summarized below:
| Aspect | Murabaha | Tawarruq |
| Subject matter | Amount of money | Commodity |
| Parties | Lender and borrower | Financier and finance and/ or expertise seeker |
| Rollover | Typically applicable | Impermissible |
| Collateral | Put up before the loan is processed | May be posted but after the commodity is purchased |
| Cost transparency | Not a condition | Stipulated/ a condition |
| Compensation | Interest | Profit |
| Ownership | The lender remains the owner of funds, while the borrower becomes liable for the amount of loan in addition to interest (repayment plus interest) | The purchaser becomes the owner of the commodity, and at the same time becomes liable for its full price (cost plus profit) |
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