Islamic finance — Murabaha

Islamic finance avoids the payment or receipt of riba (interest). A Murabaha (cost-plus-mark-up sale) achieves an economically similar outcome to a conventional loan but through a real underlying purchase and resale. The Islamic financier buys an identified asset — equipment, stock, or in some cases property — and immediately resells it to the business at a higher price, with the business paying the resale price in fixed instalments over an agreed term.

Because the mark-up is fixed at contract date, the business knows exactly what it will pay across the life of the agreement. This contrasts with conventional variable-rate facilities. The downside is that there is typically no benefit if rates fall, and early settlement rebates depend on the financier's policy — Sharia scholars generally accept some rebate but it is at the financier's discretion.

UK Islamic finance providers offering Murabaha for SMEs are still a relatively small group — Al Rayan Bank, Gatehouse Bank and a handful of specialist providers — but coverage has grown for asset finance and property finance in particular. Other Sharia-compliant structures include Ijara (lease-based), Mudaraba and Musharaka (profit-share), and Wakala (agency).