Murabaha is essentially an installment sale. The financier will purchase the item, mark it up and then divide the marked up price over time. The purchaser will then make the agreed upon installment payments.
This is a fairly straighforward approach, however it does have several drawbacks, particularly as it is applied in the US and Canada.
- All sale transactions are subject to a tax, and real estate transactions are subject to a transfer tax. In the case of Murabaha, the seller will pay a transfer tax when the property is transfered to the financier, and the financier will pay a transfer tax (at the higher Murabaha contract amount) when transfered to the purchaser. So essentially the Murabaha transaction has a higher closing cost due to the second transfer tax. Many times the financier will bury that cost into the Murabaha contract so it is not readily discernable to the customer.
- No matter when you wish to pay off the transaction you have to pay the full contract price. So unlike Musharaka or Ijara, there is no incentive to pay the transaction off early.
For these reasons, we only recommend Murabaha for something that is short term, such as inventory finance or auto finance, for long term real estate transaction, Murabaha may look to be inexpensive at the beginning, but in the long term it is more expensive. It is important to remember that our community follows many of the same statistical patterns as the general US or Canadian population, in the sense that every 7 - 10 years, there is some reason to sell, refinance or change your primary residence. Most people do not stay in the same home for 30 years, so why have to pay the profit for 30 years if you are only in a home for 12?