Murabaha explained: cost-plus financing

Murabaha is a sale at cost plus an agreed profit. In financing, the bank buys the item you want, such as a car, and sells it to you at a higher price paid in instalments. The UAE Central Bank defines it as a sale at cost plus a specific markup. Because the price is agreed when you sign, what you owe does not move with market rates.

Key takeaways

• In a murabaha the bank buys the item first and then sells it to you at cost plus a profit agreed upfront.
• The total price is set when you sign, and from 14 September 2027 a Central Bank regulation bars it from changing or being linked to an index such as EIBOR.
• A late payment cannot add profit to what you owe: any late payment fee or charity commitment must be based on administrative cost.
• The profit still has an equivalent yearly rate and an APR, so you can compare a murabaha with a conventional loan.
• Early settlement fees on Islamic financing are limited to the lender's actual costs.

What murabaha means

Murabaha means a sale at cost plus a stated profit; the word comes from the Arabic for profit. In Islamic banking the bank is the seller: it buys an asset you need and sells it to you on deferred payment. The Central Bank’s Islamic finance glossary calls murabaha a trust sale at cost plus a specific markup, paid on the spot or later.

Murabaha, official definition

Cost plus a markup

The Central Bank defines murabaha as a trust sale of an object at a price made up of the object's cost plus a specific markup, executed on a spot or deferred payment basis.

More detailed rules are coming: Regulation No. 1/2026 under the Commercial Transactions Law, which applies from 14 September 2027. It is published in Arabic only, so where this guide describes it, the wording is our translation.

Islamic transactions regulation

Applies from 14 September 2027

The Central Bank has issued Regulation No. 1/2026 under the Commercial Transactions Law, setting rules for the commercial transactions of Islamic financial institutions and takaful companies in the UAE, including financing contracts such as murabaha, ijarah and musharaka; the Rulebook gives 14 September 2027 as the date it applies from.

How a murabaha works, step by step

The bank buys first and sells second, because it can only sell you something it already owns.

1. You choose the item and promise to buy it. You pick the car or goods and can name the supplier. From 14 September 2027, your request binds you only if the promise document you sign says so.
2. The bank buys the item and takes possession. It must own and hold the item, actually or constructively, before selling. If you have already signed with the supplier, that contract must be cancelled first.
3. The bank sells it to you at cost plus profit. The contract states the total price.
4. You pay in instalments of known amounts on known dates, which need not be equal.
5. The item is yours from the sale, and you owe the price as a debt. For a car, the Central Bank’s car finance rules say the finance should be secured by a mortgage over the car; in Dubai Islamic Bank’s murabaha car finance, the car stays mortgaged to the bank with the RTA.

The bank buys before it sells

Bank buys before it sells

In a murabaha, the Islamic bank may buy the item at the customer's request but must own and hold it, actually or constructively, before selling it to the customer; if the customer has already contracted with the supplier for the item, that contract must be cancelled before the bank buys, because the bank cannot simply take over the customer's existing purchase.

Murabaha price

Fixed price at signing

Under the Central Bank's Islamic transactions regulation, a murabaha is a sale at the seller's original cost plus a fixed profit stated in the contract; the total murabaha price must be set and fixed when the contract is signed, may not vary or be linked to an index afterwards, and may be paid in one sum or in instalments of known amounts and dates.

These rules apply from 14 September 2027. Until then, the steps are set by the bank’s contract, approved by its Shari’ah committee within the Higher Shari’ah Authority’s binding standards.

If you change your mind after the bank buys

From 14 September 2027, if your promise was binding and you back out without an acceptable excuse, the bank can claim only its actual, direct loss. It cannot claim the cost of money or lost profit, fix the compensation in advance or force you to complete the purchase. It may instead keep an option to return the item to the supplier. Dubai Islamic Bank’s murabaha car finance certificate, for example, describes the customer’s promise to purchase as irrevocable. Ask before signing whether your promise is binding.

Murabaha vs a conventional loan

For your monthly budget a murabaha works like a fixed-rate instalment loan, under the same Central Bank limits. The differences are in the contract, late payment and early settlement.

An Islamic lender must tell you in advance when a late payment fee or charity commitment applies and how it is calculated, and the charge must be based on administrative cost, not profit on profit (Article 2, clause 2.1.3.12). From 14 September 2027, an Islamic debt may never be increased in return for more time.

Maximum debt burden ratio

50%

Monthly deductions for all loans and facilities from banks and finance companies together, including car loans, home loans, overdrafts and credit cards, must not exceed 50% of the borrower's gross salary and any regular income from a defined and specific source, at any time.

Is murabaha a loan?

Not legally: you owe the price of an asset, not borrowed money. But Regulation 29/2011 applies to Shari’ah-compliant banking services except in how the profit is computed and its amount set, which follows Shari’ah principles, and Islamic banks’ scheduled rates must follow it whatever they are called (Article 13 and its guidance).

From 14 September 2027, a bank may not buy an asset from you, or from a company you control, and sell it straight back to you at a higher deferred price without a substantial change in the asset, or make its purchase conditional on that resale. Such a deal would leave you with cash now, a larger debt later and the same asset back in your hands.

Is the profit the same as interest?

In amount it can be: AED 12,000 of profit costs the same as AED 12,000 of interest. But interest is the price of borrowed money and can vary, while murabaha profit is part of the price of an asset the bank owned first, fixed at signing. Whether that answers “is murabaha riba?” is a question of Shari’ah scholarship; in the UAE each product is approved by the bank’s Shari’ah committee, as the last section explains.

How murabaha profit is calculated

The bank sets the profit as an amount when you sign and adds it to its cost. Banks may express it as a yearly profit rate on the amount financed, sometimes as a flat rate, which looks lower than its reducing equivalent. Dubai Islamic Bank’s auto finance page, for example, quotes a flat profit rate with the reducing rate beside it.

• Flat quotes come with the effective rate. A bank advertising a flat rate must show the equivalent effective rate next to it (Regulation 29/2011, Article 6 guidance). The method is in flat vs reducing rates.
• Profit runs on the reducing balance. Lenders must calculate profit on financing by the reducing balance method and may not charge profit on accrued profit (Consumer Protection Standards, Article 7, clauses 7.1.5.12 and 7.1.5.13). Early instalments therefore carry more profit, which matters if you settle early.
• The APR adds the fees, so it is the figure to compare with a conventional loan.

Annual Percentage Rate

APR disclosed

Lenders must disclose the Annual Percentage Rate (APR), which includes the total interest or profit payable and other fees compounded over a year.

Worked example: a car bought with murabaha

Central Bank rules cap car finance at 80% of the car’s value, so on an AED 100,000 car at least AED 20,000 comes from you.

Maximum car finance

80%

A car loan must not exceed 80% of the value of the financed vehicle, so the buyer funds at least 20% themselves.

Worked example

Car priced AED 100,000, murabaha over 48 months

The car price, the 3.75% flat profit rate and the term are illustrations, not a bank’s offer; fees are left out.

1. Amount financed: 80% of AED 100,000 = AED 80,000, so you pay AED 20,000 upfront.
2. Profit, fixed at signing: AED 80,000 × 3.75% × 4 years = AED 12,000.
3. The bank buys the car for AED 100,000 and sells it to you for AED 100,000 + AED 12,000 = AED 112,000.
4. Deferred part of the price: AED 112,000 minus AED 20,000 = AED 92,000.
5. Monthly instalment: AED 92,000 ÷ 48 = AED 1,916.67.
6. AED 1,916.67 a month on AED 80,000 over 48 months matches a reducing rate of about 7.03% a year.

You pay AED 112,000 for an AED 100,000 car: AED 12,000 of profit, about 7.03% a year on a reducing balance before fees.

A conventional loan of AED 80,000 at 3.75% flat over 48 months gives the same instalment. Down payment and term rules are in car finance limits, and the loan payment calculator handles any amount and rate.

Where UAE banks use murabaha

Murabaha fits the purchase of a specific asset. These are examples from UAE banks’ own documents, opened on 13 October 2026.

• Cars. Dubai Islamic Bank’s murabaha car finance certificate describes the structure used in the example above: the bank buys a car from a dealer or other seller at your request, takes possession and sells it to you at its cost plus an agreed profit, paid in instalments.
• Cash. The bank sells you a commodity at cost plus profit on deferred payment, and the commodity is then sold for cash. Abu Dhabi Islamic Bank’s Covered Card Key Facts Statement calls this a commodity murabaha; buying an asset on deferred payment and selling it to a third party for cash is what the Central Bank’s glossary defines as tawarruq. Islamic credit cards shows how such a card works.
• Homes. On 13 October 2026, Dubai Islamic Bank’s non-resident home finance page linked Shari’ah certificates for “DIB Home Finance - Supply & Installation (Murabaha)” and “DIB Property Finance - Murabaha”, alongside ijarah and istisna ones. Islamic home finance compares the contracts used for homes.

The other Islamic contracts are covered in the Islamic finance guides.

Settling a murabaha early

You can settle early. The fee is limited to the bank’s actual costs, and Central Bank guidance requires Islamic banks to allow an adequate rebate on prepayment, so the final charge stays within the Central Bank’s fee caps.

Islamic early settlement fee

Actual costs only

Islamic financial institutions may charge early settlement fees only for the actual costs caused by the early settlement, in line with the Higher Shari'ah Authority resolution No. 76/3/2019, and must follow the Central Bank's early settlement rules.

The rebate matters because the price includes profit for the full term. The guidance under Regulation 29/2011, Article 7 gives no formula. Where the Central Bank requires a lender to waive part of the debt on early settlement, the lender may keep only what the Central Bank’s limits, set in line with Higher Shari’ah Authority resolutions, allow (Article 11, clause 11.1.2.2), and we have not found those limits published.

In the car example, after 24 of the 48 instalments:

The first figure is the unpaid price; the second is what a conventional loan on the same schedule would leave outstanding. Where your settlement figure falls depends on the bank’s rebate, plus any fee for its actual costs.

For a car, the steps to release the bank’s mortgage are in car loan early settlement.

Is murabaha halal?

We do not issue religious rulings; for your own situation, ask a qualified scholar. What we can explain is how a UAE product gets its Shari’ah approval. Each bank’s Internal Shari’ah Supervision Committee approves its products, the Higher Shari’ah Authority at the Central Bank must approve the members’ appointment, and the Authority’s standards are binding and final for all Islamic financial institutions (CBUAE Shari’ah governance framework).

To check a product, read the Shari’ah basis in the Key Facts Statement and ask for the Shari’ah certificate. Islamic institutions must provide certificates, and access to their internal Shari’ah function if you doubt a product’s compliance (Article 11, clause 11.1.1.9).

Shari'ah basis and approval

Shari'ah basis in the KFS

Islamic financial institutions that offer Shari'ah-compliant products must disclose the Shari'ah basis of each product and its approval by the Internal Shari'ah Supervision Committee, and the Shari'ah basis should also be included in the Key Facts Statement.

How the committee and the Authority divide the work is set out in Islamic vs conventional finance.