By Salma Bouzoubaa, 

Edited by Sanaa Kadi

The concept of Murabaha originates from the Islamic legal principle of “Bay’ al-Murabaha”, which is a type of sales contract allowed in Islamic law. This concept is rooted in the Quran and the Hadith (sayings and actions of Prophet Muhammad). In Islamic finance, Murabaha has been adapted as a financing tool to meet the needs of customers who require credit to purchase goods and assets (Muhammad Yusuf Saleem 2012). The use of Murabaha in Islamic finance is also in line with the principles of Shariah law, which prohibits the charging of interest (Riba) on loans. Instead of charging interest, the bank earns a profit by purchasing the asset on behalf of the customer and then selling it at a marked-up price (Usmani 2002). This allows the bank to earn a profit while also providing a useful service to customers who require financing for their purchases.

Figure: Murabaha transaction

Source: Sanaa Kadi

Murabaha is widely used in Islamic banking as a means of providing financing for the purchase of goods and assets. According to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), “Murabaha is a contract in which a bank or a financial institution buys a commodity from a supplier and sells it to the client at an agreed-upon price, which includes the cost of the commodity plus a profit margin.” The customer pays the bank for the commodity in installments, usually over a period of months or years. The marked-up price is the profit that the bank earns on the transaction, which is agreed upon at the time of the sale. Indeed, regardless of the circumstances, the price that was set before the sale can no longer be changed.

The Islamic finance concept of Murabaha is based on the principles of profit and risk sharing. The bank assumes the risk of the transaction, and the customer pays for the commodity over time, with the profit earned by the bank being shared between the bank and the customer. Murabaha is a widely accepted form of Islamic finance and is used in a variety of industries, including:

  • Real Estate: The bank purchases a property on behalf of the customer and then sells it to the customer at a markup. The customer then pays the bank back over a period of time. (The same system is used in all the other categories)
  • Automotive
  • Consumer Finance
  • Trade Finance

With Murabaha, customers can make purchases over time while providing a profit for the bank and sharing risk between the parties involved.

However, there may be differences between the theory and the real application of the principle of Murabaha. Here are some examples:

  • Transparency: In theory, Murabaha transactions should be transparent, and the bank should disclose the actual cost of the commodity and the profit margin to the customer. However, in practice, some banks may not fully disclose this information, leading to confusion or misunderstandings about the transaction. This lack of transparency can lead to trust issues between the bank and the customer.
  • Risk: In theory, Murabaha transactions involve the sharing of risk between the bank and the customer. However, in practice, the bank may place most or all of the risk on the customer. For example, if the customer is unable to make the payments on time, the bank may charge additional fees or penalties, which may make it difficult for the customer to repay the debt.
  • Purpose: In theory, Murabaha should be used for financing the purchase of goods and assets. However, in practice, some banks may use Murabaha for other purposes, such as refinancing or working capital. This can lead to confusion about the purpose of the transaction and whether it is compliant with Shariah law.
  • Commodity: In theory, Murabaha should involve the purchase of a physical commodity, such as gold or grain, that is owned by the bank. However, in practice, some banks may use virtual commodities or financial instruments, which may not be compliant with Shariah law.

Moreover, from the Sharia perspective, the bank is required to acquire ownership of the asset and the risks attached to ownership in transit. But as we said earlier, in Islamic finance practice, the risks attached to ownership in transit of the bank are minimal if existent at all. First, the contracts normally provide for an allocation of risk that is like the one under a conventional loan agreement. And second, instead of acquiring a specific asset, the bank often sells certain commodities to the customer, who immediately turns them into cash on the commodities exchange.

This structure—called Tawarruq—provides the customer with liquid funds and is thus even closer to a conventional loan structure. Permissibility of these structures from a Sharia perspective is not uncontroversial, to say the least—with the effect that there is always a chance that a fatwa will be issued according to which the transaction is not permissible.

The chance that an Islamic financing transaction is challenged on grounds that it does not comply with Islamic law is called “Sharia risk.” Since the emergence of the first Islamic finance cases, the issue has attracted a lot of attention. Sharia risk illustrates the changed role of Islamic law in Islamic finance. In the world of finance, law (and lawyers) normally serve to make the transaction enforceable in court. Law provides transaction security. In Islamic finance, in contrast, the role of the Sharia is reversed. Sharia is a risk, which allows the transaction to be attacked on the basis that it did not conform to Islamic legal principles (Kilian Bälz 2008).

This phenomenon shows us that even though the Murabaha contract should be a contract that avoids risks, in fact, the very use of Sharia can cause problems leading to the cancellation of the contract.

However, to mitigate Sharia risk, Islamic financing transactions normally contain a so-called “waiver of Sharia defense” clause. In this clause, although worded slightly differently from one transaction to the other, the borrower normally waives the right to bring any defense based on the non-compliance of the transaction with Sharia principles (Kilian Bälz, 2008). In addition, the clause may also provide for an explicit statement on Sharia compliance, pursuant to which the parties agree to follow the interpretation of the bank’s own Sharia board as far as the transaction is concerned.

To conclude, while the principle of Murabaha in Islamic finance is based on clear principles, its application in practice can be more complex and may vary between institutions. It is important for banks to ensure that their Murabaha transactions are transparent, fair, and compliant with Shariah law, and for customers to be aware of their rights and obligations in these transactions. For this reason, the AAOIFI provides guidance on the proper use of Murabaha in Islamic finance, including the need for transparency and fair pricing.


  • Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Shariah Standards for Islamic Financial Institutions. 2018.
  • Kilian Bälz; Sharia Risk? How Islamic Finance Has Transformed Islamic Contract Law; (Occasional Publications 9 September 2008)


The Concept of Riba in Islamic Banking and Finance

By Aishat Adegboyeva,

Edited by Sanaa Kadi


Rules and injunctions abound under Islamic Law that guides the Islamic way of life. As rightly believed by most Muslims, Shari’ah – especially the Quran and the Sunnah was revealed to guide the path of morality and conscientiousness, with matters such as ribā being seen as contrary to the injunctions of the Quran. Against this backdrop, more research is being conducted on these injunctions, especially regarding ribā, to determine how it juxtaposes modern conventional banking.

This blog post would address the concept of ribā, modern conventional principles, and whether ribā interoperates with current conventional banking or Islamic banking principles.

Understanding Ribā

Ribā is an Arabic word meaning “to increase” or ‘to exceed’, which is often used in reference to unequal exchanges or charges and fees for borrowing.[1] Matters on ribā still cause a major stir amongst scholars and Muslim jurists, especially as there exist different Islamic schools of law. Generally, ribā is considered haram (sinful) and impermissible with a strong consensus on ribā being forbidden under Sharia law.

Conventional Banking Principles – Trade or Ribā?

Ribā is synonymous with usury, which is the lending of money with an unreasonably high-interest rate.[2] Even though Islam does not prohibit banking, trading, and/or investment,[3] in Islamic banking and finance, investment, or commercial activities that return interest are considered haram (sinful) and therefore not allowed.[4] With the advent of the 20th century ushering in the practice of Islamic banking, there began the proponent of converting conventional interest-based banking and loans with the replacement of profit and loss-sharing investments.[5] The position of States choosing to set their own respective usury laws rather than prohibit them in their entirety is evidence of the prominence usury is having in modern conventional banking. The way Islamic banking has navigated this aspect especially is to provide financial transactions without charging interest rates, and in cases of advancing loans, enter a contract based on either partnership (e.g., Musharakah and Mudaraba) or sale base modes (e.g., Murabaha).[6]

Interest and loans appear to be widely accepted in conventional banking both in theory and practice,[7] which is in contrast with Islamic injunctions according to Muslim scholars.


[1] M.H. Khatkhatay and Shariq Nisar, ‘Sharī’ah Compliant Equity Investments: An Assessment of Current Screening Norms’ (2007) 15 Islamic Economic Studies 1.

[2] John Munro, ‘Usury, Calvinism, and Credit in Protestant England: From the Sixteenth Century to the Industrial Revolution’ (2011) <> accessed 26 February 2023.

[3] Choudhury Masudul Adam, Rahman Asmak and Hasan Abul, ‘Trade Versus Riba in the Qur’an with a Critique of the Role of Bank Saving’ (2018) 60 International Journal of Law and Management 701.

[4] Khatkhatay and Nisar (n1).

[5] Muhammad Zahid Siddique, ‘Modern Money and Islamic Banking in the Light of Islamic Law of Riba’ (2022) 27 International Journal of Finance and Economics 993.

[6] 6 Ibid.

[7] Ismail Abdul Ghafar, Possumah Bayu Taufiq and Ali Mohd Akil Muhamed, ‘What You Sell Is What You Lend? Revealing Complexity of Riba in Loan Contract’ (2018) 45 European Journal of Law and Economics 591


Currency Exchange in Islamic Law

By Emilie Marjatta Earl,

Today’s blog post is focused on al-sarf or currency exchange in Islamic law. The first section will explain why currency exchange could be considered as going against Islamic law. After this, the text will focus on historical developments and in the end explain how currency exchange can be conducted.

To begin the word Sharia is an Arabic term that has been translated into Islamic Law in English, while its actual meaning is “the way”. The Sharia provides Muslims with guidelines on how to live their lives in accordance with God’s Will. Within Sharia, there is a prohibition of Riba. Riba is the Arabic term for Usury. Sharia prohibits unjust enrichment through interest payment. Riba is in most cases referred to when discussing loans, as banks tend to apply an extra fee (interest) on loans, which grows while the person pays back the loan. Islamic banks do not, therefore, use interest in their loans, as they cannot make an unjust profit according to Sharia. However, this same train of thought is applied to al-sarf (currency exchange) as well, which I will explain below.

Historically people did not always have money to acquire the things they wanted, instead, they used trading methods, for example, gold. In Islamic states, they used gold and silver before money, and they held a certain value that was widely accepted in the community.[1] This meant that they could use silver and gold in exchange for something else, but they could not exchange gold for more gold, or then they would have made an unjust profit and that would have made the gold into a commodity and therefore caused Riba.[2]

When money emerged in the Islamic states, the same principles for gold and silver were applied to it. This means that money should only be used as a means of exchange, and this was also apparent from the early economic thought of Al-Ghazali who believed that a currency functions “as a basis of value, medium of exchange and value for savings”.[3]

Now you may be thinking how it is then possible to exchange money without Riba, as different currencies hold different values. In order to make it possible Islamic Scholars have within Sharia provided a Bai’ al-sarf (sale contract for currency exchange). This provides that different currencies can be exchanged if the following rules are applied: the exchange will be done then and there in full, and the exchange will be done with the existing rate or with another rate if it is mutually greedy and it needs to be done physically (cash) or by constructive possession (from the bank account directly).[4]

In conclusion, even though al-sarf (currency exchange) can cause Riba (usury), as long as the Bai’ al-sarf (sale contract for currency exchange) is followed, al-sarf (currency exchange) is accepted under Sharia according to most Islamic scholars.


[1] Saleem, Muhammad Y. Islamic Commercial Law. John Wiley & Sons Singapore, 2013, chapter 3,

[2] Ibid.

[3] Samsuddin, Nur, et al. “Islamic Economic Thoughts of Prominent Muslim Scholars in the Abbasid Era.” International Journal of Academic Research in Business and Social Sciences. P.31

[4] Bai` al-Sarf (Currency Exchange) What is Bai’ al-sarf? Illustration of Bai’ al-sarf application Component Bai’ al-sarf, Accessed 23 February 2023.

“Exploring Islamic Finance in a Masterpiece: The student Blog Presentations Held in the Iconic University of Helsinki Main Building”

By Sanaa Kadi,

The Islamic business law course offered by the Faculty of Law at the University of Helsinki from 6.2-3.3. 2023 was held in the university’s main building, which is a true masterpiece of architecture in Helsinki. 

The main building is not only a stunning work of art, but it also offers a rich academic environment, providing a conducive atmosphere for learning and discovery. The building is equipped with modern facilities, including lecture halls, seminar rooms, and study areas, which offer a comfortable and convenient learning environment for students.

The Islamic business law course, held in this historic and iconic building, was a unique opportunity for students to not only learn about Islamic finance and its principles but also to experience the academic and cultural richness of Helsinki’s university buildings.

To further enhance their learning, the law students were asked at the end of the course to present a blog post about one of the topics of Islamic business law. These blog posts are progressively published in this blog, Islamic Business and Financial Law. A law student said:

“I initially had knowledge of how business law operated from the purview of conventional commercial banking, but learnt more of that from the Islamic law perspective as well.”

Overall, the Islamic business law course held in the University of Helsinki’s main building was a unique and enriching experience for law students, providing them with an opportunity to learn in a beautiful and inspiring environment, while also expanding their knowledge and understanding of Islamic finance and its principles.


Cryptocurrencies and Islamic Law – love or hate relationship?

By Ruslan Saleev,


It is time to accept it – cryptocurrencies are here and they are disrupting the financial sector. It is as disruptive as fiat currencies (currencies that are not backed by gold or silver, e.g. US dollar since 1971), credit cards, and options once were.

Since Islamic law is highly dependent on fatwas (legal opinions of Shariah experts), the ultimate fate of cryptocurrencies – whether it is haram, and hence impermissible, or halal, and hence Shariah-compliant – will be determined by such a fatwa.

Grand Mufti of Egypt Shaykh Shawki Allam, the Turkish Government, Fatwa Center of Palestine, and UK-based scholar Shaykh Haitam all think that Bitcoin, one of the most popular cryptocurrencies, is haram[1]. Among the arguments that they operate with are: there is no central authority that monitors the cryptocurrency, it is open to speculation (and hence, there is excessive gharar – uncertainty, hazard), the cryptocurrency not being backed by anything, and even used in illegal activities[2].

Muneer Khan, head of Islamic finance and Middle East practices at Simmons and Simmons, on the other hand, claims that there might be a misunderstanding of the nature of cryptocurrencies by the scholars and Shariah experts due to the lack of knowledge in the area of modern-day finance and technology[3].

Qatar University professors and researchers agree with Khan on that. They criticize the opponents of cryptocurrencies by arguing that, for example, gold, which is Shariah-compliant, does not have a central authority either and that its price is volatile, too[4]. Moreover, just like fiat currencies, which are generally regarded as Shariah-compliant, cryptocurrencies depend on public acceptance and confidence[5].

The third view is somewhat in the middle – the fatwa center of South African Islamic seminary is of a view that cryptocurrencies, such as Bitcoin, fulfill the conditions of maal (property) – the main argument is that it has been accepted through general societal concurrence (urf, customary practice) – and hence it can be traded. Nevertheless, the center claims that in order to be considered a currency, relevant governmental bodies have to approve it first[6].

Not all cryptocurrencies are considered to be haram even by their general opponents. OneGram was the first cryptocurrency that has been certified in compliance with Shariah. Among other reasons, it is accepted by the Shariah experts due to the fact that it is backed up by gold and 2,5% of profits from OneGram transactions go to their charity (thus fulfilling the requirements of zakat, one of the five pillars of Islam)[7].

As can be seen from the arguments presented above, there are many views when it comes to determining whether cryptocurrencies are Shariah-compliant. We can only speculate at this point whether cryptocurrencies are going to gain a wide fatwa recognition – yet, much depends on it, since four of the ten biggest sovereign funds are run by majority-Muslim countries, and large portions of those funds´ investments go into Shariah-compliant assets[8].

[1] Mufti Muhammad Abu-Bakar, “Shariah Analysis of Bitcoin, Cryptocurrency, and Blockchain”, 5 April 2017 < > accessed on 27 February 2023.

[2] Ibid.

[3] Gerrit De Vynck, “Islam has a rich tradition around finance. Crypto is prompting new questions.” (Washington Post, 8 March 2022) < > accessed on 28 February 2023.

[4] Andrew Dahdal, Jon Truby, Otabek Ismailov, “The Role and Potential of Blockchain Technology in Islamic Finance” [2022] 33 European Business Law Review 175, 188 < > accessed on 1 March 2023.

[5] Ibid.

[6] Ziyaad Mahomed, Shamsher Mohamad, “Crypto Mania: The Shariah Verdicts”(Centre for Islamic Asset and Wealth Management, 2017) < > accessed 1 March 2023.

[7] For more information on OneGram, see < > accessed 1 March 2023.

[8] See supra note (3).

Islamic Financial Principles in the UK: Examining the Legal Basis of Murabaha & the Implications of Applying the ECHR/Equality Act 2010

By Wyon Sandells, 

Edited by Sanaa Kadi

Under the principles of Islamic Finance, the prohibition of riba (usury) reigns supreme due to it going against the Qur’an and Sunnah. As a result, Islamic finance has developed alternative methods to allow investors to profit.

An example of this is Murabaha, which is ‘a sale of an item to a buyer where the seller expressly mentions the cost, they have incurred on the commodities to be sold and sells it to another by adding…[a known] profit or mark-up’.[1]

However, when the customer defaults with English law governing, it is followed instead of Shari’ah, thereby not allowing the buyer to default (while allowed under Shari’ah). This can best be seen in the case of Shamil Bank of Bahrain and Beximco Pharmaceuticals of Bangladesh, where a Murabaha agreement, although containing a clause that said that it would be ‘subject to the principles of the Glorious Shari’ah…[and] governed by and construed in accordance with the laws of England’, the court solely enforced English law, holding that it was not possible to apply Shari’ah.[2]

This, therefore, raises the question of if Shari’ah is not followed, then why does English law govern Islamic financial contracts?

To understand this, it is necessary to state both art.9 of the European Convention of Human Rights (implemented under the Human Rights Act 1998), and s.19 of the Equality Act 2010.
Art.9 allows ‘Everyone…to manifest his religion or belief, in worship, teaching, practice, and observance’, while s.19 prohibits ‘a provision, criterion, or practice which is discriminatory in relation to a relevant protected characteristic’ (Religion and Belief being one under s.10).

Therefore, to ensure an impartial system, since 2001, there have been several UK Government and Financial Conduct Authority (FCA) initiatives to establish English law as an international Islamic financial legal system.[3] An example being a working group that reformed the Finance Act to facilitate Murabaha by removing a double tax charge which taxed both the acquisition and sale of a good.[4]

These reforms lead to the development of an alternative financing system, allowing English legislative and regulatory measures to facilitate Shari’ah-compliant transactions,[5] while also encouraging more ‘investment’ and economic growth at the national level.[6]

However, although the ideas behind this system, originate from Shari’ah, it is still English law, and therefore does not permit the use of Shari’ah’s legal sources. This is by design and not by choice, as the government states that it is ‘a secular regulator’,[7] which ensures that ‘all financial institutions…are subject to the same standards…[regardless of] their religious principles’.[8]

As a result, a paradox exists as, while the government cannot assist in ensuring that transactions are Shari’ah-compliant, its courts are not permitted to enforce Shari’ah law as the governing law. This is to avoid going against the ECHR and Equality Act. However, by refusing to enforce Shari’ah law, the government is effectively prioritizing English law over Shari’ah law, which may be viewed as a violation of the ECHR and Equality Act, thereby creating a complex legal landscape for Shari’ah-compliant finance in the UK.



Fielding S, ‘Mediation in the Church of England: Theology and Practice’ (2010) 13 Ecclesiastical Law Journal 69

REDmoney, The Islamic Finance Handbook (John Wiley & Sons 2014) 535, ‘Practice Guide 69: Islamic Financing’ (GOV.UK) <> accessed on 24th February 2023.


[1] ‘Practice Guide 69: Islamic Financing’ (GOV.UK) <>.

[2] REDmoney, The Islamic Finance Handbook (John Wiley & Sons 2014) 543-544.

[3] REDmoney, The Islamic Finance Handbook (John Wiley & Sons 2014) 540.

[4] REDmoney, The Islamic Finance Handbook (John Wiley & Sons 2014) 540.

[5] REDmoney, The Islamic Finance Handbook (John Wiley & Sons 2014) 541; Stephen Fielding, ‘Mediation in the Church of England: Theology and Practice’ (2010) 13 Ecclesiastical Law Journal 70.

[6] REDmoney, The Islamic Finance Handbook (John Wiley & Sons 2014) 542.

[7] Stephen Fielding, ‘Mediation in the Church of England: Theology and Practice’ (2010) 13 Ecclesiastical Law Journal 73-74.

[8] Stephen Fielding, ‘Mediation in the Church of England: Theology and Practice’ (2010) 13 Ecclesiastical Law Journal 73.