Murabaha Calculator (Islamic Finance)
Murabaha Calculator (Islamic Finance)
Cost-plus sale financing: the profit, the total you pay and the monthly instalment for a murabaha on a flat or reducing-balance profit rate, with the equivalent rate on the other basis.
Murabaha instalment
Asset $10,00,000, down payment $2,00,000, 4% flat for 4 years
Murabaha instalments on a flat and a reducing rate
- F
- the amount financed: cost less down payment
- f, r
- the annual profit rate, flat or reducing
- y, n
- the term in years, and the number of monthly instalments
- equivalent rate
- the i that makes F equal to the instalments discounted at i, found by 24 halvings of the interval from 0 to I ÷ F, which is proven to contain it; the result is within 0.00001 percentage points
Worked example
Asset $10,00,000, down payment $2,00,000, 4% flat for 4 years
Amount financed = 10,00,000 − 2,00,000 = $8,00,000
Profit = 8,00,000 × 4% × 4 = $1,28,000
Instalment = (8,00,000 + 1,28,000) ÷ 48 = $19,333
Equivalent reducing-balance rate: 7.47% a year
The same 4% on a reducing balance would cost $18,063 a month, $67,036 in profit (a flat rate of 2.09%)
Flat profit rates and their reducing-balance equivalents
| Term | 3% flat | 4% flat | 6% flat |
|---|---|---|---|
| 1 year | 5.49% | 7.30% | 10.90% |
| 2 years | 5.66% | 7.50% | 11.13% |
| 3 years | 5.68% | 7.51% | 11.08% |
| 4 years | 5.67% | 7.47% | 10.97% |
| 5 years | 5.64% | 7.42% | 10.85% |
| 7 years | 5.57% | 7.30% | 10.58% |
How a murabaha is priced
In a murabaha the bank does not lend money. It buys the car, property or goods you want and sells it to you at its cost plus a profit that both sides agree, disclosed in the contract. You pay the selling price in instalments. Because it is a sale, the price is fixed once signed: late payment cannot add to the bank’s profit, though many contracts oblige a late payer to give an amount to charity.
Flat or reducing. Banks work the profit out with a rate, and quote it in one of two ways. A flat rate is charged on the full amount financed for the whole term, even though you repay part of it every month. A reducing-balance rate is charged only on what is still outstanding, as a conventional EMI is. The same number means very different costs: on the example, 4% flat costs $1,28,000 in profit, and is the same as 7.47% on a reducing balance. Offers show both. In the UAE the Central Bank requires a bank advertising a flat rate to state the equivalent effective rate beside it, and Sharjah Islamic Bank’s personal finance, for example, is published as 5.29% reducing and 2.89% fixed. Compare offers on the reducing rate, and check it with the EMI calculator.
How the equivalent rate is found. No formula turns a flat rate into its reducing equivalent, so the page searches for it: it halves an interval proven to contain the answer 24 times, which pins the rate to within 0.00001 percentage points.
Paying early. The chart shows two balances. The instalments still owed are your debt under the contract. The cost still outstanding is what remains of the financed amount on the reducing basis; the gap between them is profit not yet earned. Many banks give a rebate (ibra’) of some or all of that profit if you settle early, and some charge a settlement fee, but the terms are the bank’s and vary. Read the key facts statement. Compare with a conventional loan in the car loan EMI calculator. This is arithmetic on the figures you enter, not financial advice.
Frequently asked questions
How is murabaha profit calculated?
On a flat rate, amount financed × rate × years: 8,00,000 × 4% × 4 = $1,28,000. On a reducing rate it is worked out like EMI interest, on the balance still outstanding each month.
Is a murabaha flat rate the same as an interest rate?
No. A flat rate is charged on the full amount for the whole term, so it understates the cost. 4% flat over 4 years is about 7.47% on a reducing balance, the basis of an ordinary loan rate.
Can the murabaha price go up if I pay late?
No. The selling price is fixed in the contract. Contracts commonly require a late payer to donate an agreed amount to charity instead, which the bank does not keep as profit.
Do I get a rebate for settling early?
Often, but it depends on the bank and your contract. Many banks rebate some or all of the unearned profit (ibra’), and some charge a fee. Check the key facts statement.
Related calculators
References
- Central Bank of the UAE. Regulation No. 29/2011 regarding Bank Loans and Other Services Offered to Individual Customers, Article 6: a bank advertising a flat rate must state the equivalent effective rate side by side; Islamic banks may use their own terminology. https://rulebook.centralbank.ae
- Sharjah Islamic Bank. Personal Finance Key Facts Statement: profit rates quoted as reducing and fixed (flat), e.g. 5.29% reducing (2.89% fixed); profit calculated by the reducing-balance method; possible rebate of future profit on early settlement. https://www.sib.ae/en/PF-KFS
- Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Shari’ah Standard No. 8: Murabahah.
- Central-bank inflation targets used as default inflation by currency: Reserve Bank of India (4% CPI, flexible inflation targeting framework); U.S. Federal Reserve (2% PCE); European Central Bank (2%); Bank of England (2% CPI); Bank of Canada (2%); Reserve Bank of Australia (2–3%); Bangko Sentral ng Pilipinas (3% ± 1). Actual inflation often runs above target.