Murabaha is an Islamic finance sale in which a bank buys an asset and sells it to its customer at cost plus a disclosed, agreed profit, usually with the price paid in instalments. The customer gets the asset now and pays later, and the bank earns a profit on a sale rather than interest on a loan.
What is murabaha?
In a murabaha the seller tells the buyer what the asset cost and adds a profit both sides agree. Islamic banks use it as a financing tool: the customer asks the bank to buy a specific asset, the bank buys it and owns it, then sells it to the customer at the agreed marked-up price on deferred terms. The total price is fixed when the sale is made.
Tawarruq, sometimes called commodity murabaha, is a related structure used when the customer needs cash rather than an asset: the customer buys a commodity on deferred murabaha terms and sells it to a third party for immediate cash.
How does a murabaha facility work?
- The company asksThe company identifies the asset and the supplier and asks the bank to buy it.
- The bank buysThe bank buys the asset and takes ownership of it before selling it on.
- The bank sells at cost plus profitThe bank sells the asset to the company, disclosing its cost and the agreed profit. The total price is fixed.
- The company pays over timeThe company pays the price in instalments over the agreed term.
- Finance tracks the facilityThe finance team records what it owes the bank, schedules the instalments and the profit within each, and checks any covenants in the facility agreement.
What does a murabaha look like in practice?
Why does murabaha matter for finance teams in Saudi Arabia?
A murabaha facility sits in the debt schedule like any other financing. Treasury needs the balance outstanding, the instalment dates, the profit charged each period and the covenant tests. The part due within 12 months is a current liability (IFRS 18, paragraph 101, as under IAS 1 before it), which affects working capital, and the instalments belong in the 13-week cash flow forecast.
For VAT in Saudi Arabia, the 2024 amendments to the VAT Implementing Regulations, explained in ZATCA's April 2025 guideline, allow full deduction of input VAT on goods supplied under financing contracts with licensed financial institutions, such as murabaha, even when instalments remain unpaid after twelve months. The conditions: the contract is still in effect, there is no legal dispute over it, the supplier has declared the full VAT due, and the customer holds the supplier's written certificate confirming that (Article 40, paragraph 10).
Structures differ by bank and contract. This page is general information, not Sharia, legal or tax advice: your bank's Sharia board and your advisers confirm how a specific facility works.
Questions people ask
Is murabaha the same as a loan?
Economically it works like one: the company gets the asset now and pays over time. Legally it is a sale: the bank owns the asset before selling it, and its return is a profit on the sale, fixed at the start, not interest on money lent.
What is the difference between murabaha and tawarruq?
In a murabaha the company keeps the asset it needed. In tawarruq the company buys a commodity on deferred terms and sells it straight away to a third party for cash, so the result is cash financing.
Is input VAT on goods bought through murabaha still deductible if instalments run past 12 months?
In Saudi Arabia, yes, under the 2024 amendments, for financing contracts with licensed financial institutions, provided the contract remains in effect, there is no legal dispute, the supplier has declared the full VAT, and you hold its written certificate confirming that.
Official and primary sources, read on the date shown. Rules change: confirm with the authority or your adviser before you act.
- ZATCA: Guideline for Amendments to the VAT Implementing Regulation, Resolution (01-06-24), Issue 1, April 2025, section 2.9 (input VAT on goods supplied under financing contracts such as murabaha, Article 40, paragraph 10) (read 9 October 2026)
- IFRS Foundation: IFRS 18 Presentation and Disclosure in Financial Statements (issued standard, HTML), paragraph 101 (current liabilities) (read 9 October 2026)