Most Islamic finance products are built from a small set of contracts. Murabaha is a cost-plus sale, ijarah is a lease, musharakah and mudarabah are partnerships, tawarruq is a commodity sale used to raise cash, and istisna and salam are sales of goods to be made or delivered later. The definitions below follow the Saudi Central Bank rulebook, which is a useful regulator-written reference.
Knowing these terms makes it much easier to read a financing offer, a savings account’s terms or a sukuk prospectus. This guide is general information, not a religious ruling.
Why does Islamic finance use these contracts?
Islamic finance avoids riba, usually translated as interest, so a bank cannot simply lend money and charge for the time it is outstanding. Instead, returns come from trade (a sale at a profit), from leasing an asset, or from sharing the profit and loss of a business. Each contract below is one of those three routes.
Murabaha: cost-plus sale
SAMA defines murabaha as “a sale contract whereby the bank sells to a customer a specified asset”, with the price set as cost plus an agreed profit. In practice, the bank buys the item the customer wants, such as a car or equipment, and sells it to the customer at a disclosed mark-up, payable in instalments. The mark-up is fixed at the start. Murabaha is the most common structure in Islamic consumer and trade finance.
Ijarah: leasing
Ijarah is “a contract made to lease the usufruct of a specified asset for an agreed period against a specified rental,” according to SAMA. The bank owns the asset and rents it to the customer. In ijarah muntahia bittamleek, ownership passes to the customer at the end of the lease. It is widely used for home finance, vehicles and many sukuk, where investors receive the rental income.
Musharakah: joint partnership
Musharakah is “a partnership contract in which the partners agree to contribute capital to an enterprise,” in SAMA’s words. Profit is shared in an agreed ratio and losses in proportion to capital. In diminishing musharakah, used for home finance, the bank and the buyer co-own a property, the buyer pays rent on the bank’s share and gradually buys that share until they own it outright.
Mudarabah: capital and expertise
Mudarabah is “a partnership contract between the capital provider (rabb al-mal) and an entrepreneur (Mudarib).” One side provides the money, the other the work. Profit is shared as agreed, while financial loss falls on the capital provider unless the manager was negligent. Many Islamic savings and investment accounts use mudarabah, with the depositor as capital provider and the bank as manager.
Tawarruq: commodity murabaha
Tawarruq, also called commodity murabaha, is “a murabahah transaction based on the purchase of a commodity from a seller or a broker.” The customer buys a commodity from the bank on deferred payment, then sells it immediately for cash. The result is that the customer receives cash now and repays more later. It is widely used for personal finance and bank liquidity, and it is also the contract scholars debate most, since critics argue it comes close to a loan in substance.
Istisna and salam: paying for goods in advance
Istisna is “the sale of a specified asset, with an obligation on the part of the seller to manufacture/construct it.” It is used to finance construction and manufacturing, such as buildings or ships. Salam is “the sale of a specified commodity that is of a known type, quantity and attributes for a known price,” paid in full upfront and delivered later. It is used mainly in agriculture and commodities.
Comparison table
| Contract | Type | Return comes from | Common uses |
|---|---|---|---|
| Murabaha | Sale | Fixed mark-up | Car, equipment and trade finance |
| Ijarah | Lease | Rent | Home and vehicle finance, sukuk |
| Musharakah | Partnership | Shared profit | Home finance, project finance |
| Mudarabah | Partnership | Shared profit | Savings and investment accounts, funds |
| Tawarruq | Sale | Fixed mark-up | Personal finance, liquidity management |
| Istisna | Sale | Price of the finished asset | Construction, manufacturing |
| Salam | Sale | Price difference on delivery | Agriculture, commodities |
How to use this when comparing products
- Ask which contract is used. It tells you whether your return or cost is fixed (murabaha, tawarruq) or variable (musharakah, mudarabah).
- Check who carries the risk. In a lease, the bank owns the asset. In a partnership, both sides share outcomes.
- Look for the Shariah approval. The product should be approved by the institution’s Shariah board, often with reference to AAOIFI standards.
FAQ
Murabaha, the cost-plus sale, is widely used in consumer and trade finance.
In musharakah all partners contribute capital. In mudarabah one side provides capital and the other provides management and work.
Usually ijarah or diminishing musharakah, and sometimes murabaha.
The amount can look similar, but the structure differs: the bank sells an asset it owned rather than lending money. Whether that difference is sufficient is decided by Shariah scholars, not by this guide.
