Mostly Used Islamic Finance Instrument: Murabaha

The term "Islamic finance" refers to the financing system that follows Shariah. Compliance with Shariah is different from the traditional debt-financing systems that exist in the Western banking system. According to the Shariah rules, business transactions cannot involve Riba (excess or increase, interest), Gharar (uncertainty), Maisir (speculation), and Qimar (gambling). While Quran prohibits application of Riba it does not mean that Shariah prohibits making profit. It scrutinizes the basis on which the profit is made, with the rationale that charging interest is harmful for the borrower while financiers would enjoy profits without spending any efforts of their own. These barriers led Islamic institutions and scholars to establish Shariah compliant finance techniques.¹ Among of all Islamic financing options, Murabaha is the most commonly used one. Today, 90% of Islamic banking transactions are done using Murabaha.²