Murabaha (also spelled murabahah) is a shari’a compatible mode of debt financing which involves the sale of a commodity mostly for a deferred price. The two parties to the contract are: a financier (usually an Islamic bank) and a client. In its business form, murabaha is initiated when a potential buyer orders a commodity to pay for it with a specified mark-up (profit or ribh). The seller accepts and accordingly procures the commodity. Once the commodity is legally possessed by the seller, the buyer is asked to purchase it and takes delivery. As such, the commodity must exist at the time of contract, and must be owned by the seller at that time whether via constructive (qabd hukmi) or physical possession (qabd fe’eli). Furthermore, quality and quantity must be defined in clear-cut terms, and the exact date and method of delivery must also be specified.

Murabaha is a type of sale (classified in the category of trust-based sales) where the price is set at the contracting session (majlis al-aqd). Hence, if the murabaha buyer defaults on payment on the due date, the sale price cannot be readjusted upward. In interest-based loans (quroodh ribawiah), the amount of loan (qardh) increases in proportion to the length of the period of default. In murabaha financing, once the price is set, it cannot be increased.

Contrary to conventional finance, the concept of compensation in the case of default is not accepted by the majority of contemporary shari’a scholars. This concept does not conform to the principles of Islamic law and is not the proper solution to the problem of default. A viable post-ante solution suggested by shari’a revolve around inflicting punishment on well-off defaulting debtors. However, if it becomes evident that the buyer defaulted due to insolvency, then the seller cannot consider punishment, let alone penalty. An ex-ante solution could be the provision of guarantees and collateral by murabaha buyers (borrowers) as security. If financing is repaid on the due date, the transaction expires with no party owing the other any thing. And if the buyer delayed repayment, some scholars are of the opinion that intentional delays can be discouraged by recourse to a type of security. Others suggest that a penalty for non-fulfillment shall be claimed by the seller (for example, equal to the average rate of return for murabaha accounts with the bank in its capacity as a seller/ financier). This penalty, however, shall be used for charitable purposes and qardh al-hasan (benevolent loan).