Murabaha Transactions: Overview (UAE)

Murabaha financing is the most widely used structure in Islamic finance, underpinning the majority of Sharia-compliant lending across the GCC. Abdullah Qureshi and Nadim Khan have authored a comprehensive practice note for Thomson Reuters Practical Law examining the mechanics, legal framework, documentation considerations, and recent market developments shaping murabaha transactions in onshore UAE. The note provides a practical reference for financiers, borrowers, and advisers navigating this increasingly important area of the regional financing market.

Structure and basic rules

In a financing context, murabaha is a cost-plus sale in which a financier purchases an asset and sells it to the company at the acquisition cost plus an agreed profit, with payment deferred to an agreed maturity or paid in instalments. The note examines the foundational rules governing these transactions, including the requirements around ownership and possession, the prohibition on variable pricing, and the calculation of cost and profit elements.

› Rules applicable to sales under Islamic law, including the requirement for the financier to acquire and possess the asset before the onward sale

› Deferred payment rules requiring the sale price to be fixed and known at inception, with no variable or benchmark-linked pricing

› Cost and profit calculation rules, including permissible methods for determining the profit element

Types of murabaha

The note distinguishes between two broad murabaha structures used in contemporary Islamic finance. Traditional (or asset) murabaha involves the sale of an asset the company genuinely intends to acquire and use, and is commonly applied in asset acquisition, real estate, and trade finance. Commodity murabaha (tawarruq) functions as a liquidity-generation mechanism and is the most prevalent structure globally, though it remains more controversial among Islamic scholars.

› Traditional murabaha as a genuine asset-based sale, widely accepted as Sharia-compliant

› Tawarruq as a liquidity tool using commodity sales, subject to AAOIFI Standard 30 requirements

› Key distinctions from other Islamic financing methods, including musharaka, mudaraba, ijara, salam, and istisna’a

Legal and regulatory framework

Murabaha transactions in the UAE operate within a hybrid legal environment combining codified federal legislation with Islamic Sharia principles. The note covers the statutory framework under the Civil Transactions Law and the Commercial Transactions Law, the role of Sharia as a residual source of law, and the centralised Sharia governance regime overseen by the Higher Sharia Authority.

› Statutory definitions and requirements under the Commercial Code, including Articles 481 and 482

› The hierarchy of Sharia schools applied by UAE courts in murabaha disputes

› The binding status of AAOIFI Sharia Standards under HSA Resolution No. 18/3/2018

Documentation and structuring

The note examines the documentation architecture of murabaha financing, from the asset-backed requirements that distinguish a valid murabaha from an interest-based loan, to the suite of Sharia-specific provisions that allocate compliance responsibility between the parties. It also addresses the treatment of early repayment, rebates, and late payment mechanisms.

› Asset-backed requirements: real ownership, constructive possession, and risk-bearing by the financier

› Sharia construction clauses, supremacy and override provisions, and representations on compliance

› Early repayment mechanics and the voluntary rebate framework under AAOIFI Standard 8

› Late payment treatment, including the commitment-to-donate mechanism and recent judicial developments

AAOIFI Standard 59 and the long-short murabaha

The note addresses the significant impact of AAOIFI Sharia Standard No. 59 on murabaha structuring in the UAE, particularly for transactions requiring variable profit linked to benchmark rates. Standard 59 prohibits the rolling murabaha structures previously used to replicate floating-rate economics, prompting the market to develop the long-short murabaha as a compliant alternative.

› The constraint on rolling or sequential murabahas that increase an existing debt obligation

› The long-short structure: a single long-term murabaha for the fixed margin, supplemented by periodic short murabahas for the benchmark-linked component

› Practical implications for syndicated facilities and cross-border transactions

Tax treatment and market developments

The note covers the interaction between murabaha financing and the UAE tax framework, including corporate tax, VAT, and withholding tax treatment. It also examines recent market trends, including the growing role of private credit, non-bank financiers, and the increasing importance of Sharia-compliant structures for a diversifying regional economy.

› Corporate tax: murabaha profit treated as interest under the Corporate Tax Law and subject to the general interest deduction limitation rule

› VAT: economic substance approach ensuring the profit element is treated as exempt, in line with conventional finance

› The emergence of private credit and alternative financing in the GCC, and murabaha as an entry point for non-bank capital providers

Read the full practice note on Practical Law ↗

This practice note forms part of Hourani’s growing library of publications on Thomson Reuters Practical Law, providing a detailed reference for parties involved in Islamic finance transactions in the UAE, from traditional banks and private credit providers to funded companies and their advisers.

To access the full practice note, visit the Practical Law website. To speak with our team, contact Nadim Khan, Partner and Head of Banking & Finance, or Abdullah Qureshi, Associate.

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