• This Practice Note presents the structure of the Commodities Murabaha transaction.

Key features

A customer does not obtain a physical asset for their own use, but to engage in a series of purchase and sales transactions that result in them obtaining working capital or acquisition financing.

Rather than use the asset in its business, the customer sells the asset to a third party for cash (although such sale is not a required element to make it a valid transaction under Sharia).

Metals (other than gold or silver) traded on the London Metal Exchange usually constitute the assets subject to such a transaction. The metals are generally purchased by the Islamic Financial Institution (IFI) at market value for spot delivery and payment and then immediately sold to the Customer at an agreed mark-up price on a spot delivery and deferred payment basis. The Customer then immediately sells the assets to a third party for spot delivery and payment. The result of this series of trades is that the Customer receives cash and has a deferred payment obligation to the IFI.