A murabaha sale is when someone owns or buys something then resells it for a higher price and may accept to collect the payment in installments. To some, a Murabaha program with installment payments may appear to have the qualities of a loan because in many ways it is similar to a loan from the seller to the buyer. However, there are differences and the following requirements must be met in order for the transaction to be a true sale, not a loan that pretends to be a sale.
- The financier must have full ownership responsibility for the property, preferably with a legal title. This means that if damage, expense or any other form of liability occurs to the property before it is sold, then the financier is the sole responsible party.
- Ownership cannot be based upon a precondition that a particular consumer must purchase it.
- The financier must be the seller on record; otherwise the financier is a broker or lender.
- The sale price on record must be the TOTAL of all installments added together and should not be based on or change with time.
- If there is any future liability for warranty, misrepresentation, or anything else that is legally the liability of a seller, then such liability must fall upon the financier because it is he who sold you the property.
Excluding ANY of the above criteria invalidates the sale as a legitimate murabaha (profit) transaction. If a financier is unable to meet these conditions, it tells us that the relationship is not a true sale, but an interest-based loan since a true resale relationship would find all of the required conditions normal and logical.
In conclusion, for homes and other high-value financing, murabaha is not practically possible unless it is an installment payment sale from an actual owner. The only proper Islamic Murabaha model we have seen is the type followed by Truly Interest Free The only remaining viable options according to Shariah are musharaka (partnership) or a program that involves Ijara wa Iqtinaa' (rental while purchasing). Read more about what constitutes Ijara wa Iqtinaa'.