By: Iqbal Karmally

In Islamic trade finance, the bank does not lend — it buys and sells. That single difference, and the genuine risk it carries, is what separates a legitimate transaction from an interest-bearing loan in disguise.

Islamic finance has outgrown the label of niche. By the 2025 Islamic Finance Development Report, the industry’s assets reached almost US$6 trillion in 2024 — up by more than a fifth in a single year — and it now operates in more than 80 countries. Most of that is Islamic banking, and within Islamic banking one contract does the heavy lifting: the International Monetary Fund has put the share of Islamic financing structured as Murabahah at 70 to 80 percent, and notes that this cost-plus sale is used heavily to finance international trade. For anyone working in trade, treasury or payments, Murabahah is not a curiosity at the edge of the market; it is how a large and fast-growing share of global commerce is paid for.

To an outsider, Islamic import financing looks like any other: a customer needs goods, the bank provides the money, the customer repays with something on top. That likeness, however, is misleading. In a conventional loan, the bank lends money and earns interest, with the goods as security; in its Islamic equivalent, the bank does not lend at all. It buys the goods, owns them, carries their risk, and only then sells them on at a profit. The bank must briefly become a merchant — and that is no technicality.

A sale, not a loan

The instrument that does most of this work is Murabahah, a cost-plus sale. The bank buys the goods its customer needs and sells them on at the price it paid plus a profit margin disclosed and agreed in advance, usually with payment deferred. Because of that disclosure, the customer knows exactly what the bank paid and what it is making. This means there is no hidden spread, no charge for time or the use of money.

And the rule is strict: no one can sell what they do not own, so the bank must own the goods before selling them. This sequencing is the basis on which the profit is lawful, resting on a maxim of Islamic commercial law — no entitlement to profit without assuming risk. Strip the risk away, and the profit becomes, in substance, interest.

Two ways to take ownership

The bank takes ownership in one of two ways. It may deal with the supplier itself — ordering, paying and taking title, then selling the goods on in a separate transaction; this is the cleaner arrangement, and the one scholars prefer. Far more often, the bank appoints the customer as its buying agent: they source the goods and take delivery, but on the bank’s behalf and in its name, not yet for themselves. A textile mill importing raw cotton, for instance, knows its grades and suppliers far better than its bank ever could, so the bank lets the mill buy as its agent while paying the exporter itself. Crucially, the bank pays the supplier directly — an essential safeguard, since money going straight to the supplier is money that has actually bought goods, which stops the arrangement from sliding into a cash loan dressed as trade.

The agency route asks the customer to play two roles, never at once: first, as agent, the customer buys the goods so the bank comes to own them; then, the customer offers to buy from the bank, the bank accepts, and the sale is concluded. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the industry’s leading standard-setter, insists these be genuinely separate events — the bank owning the goods before it sells them, and the onward offer and acceptance a real contractual moment.

But why insist on this? The answer lies in the gap between the two sales. Between the bank’s purchase and its onward sale, the goods are at its risk: if a consignment is lost or destroyed in that interval, the loss is the bank’s. A Murabahah in which the bank is never, for a single moment, exposed to the goods is not a sale but a loan with extra documents, and scholars will treat it as one.

Possession without a warehouse

Ownership is bound up with possession, where Islamic law is more practical than it is often given credit for: possession need not be physical. A bank is not expected to stack imported machinery in its warehouse. What is required is that the goods sit genuinely at the bank’s disposal, with their risk on the bank: constructive possession. In documentary trade, this comes through the transport documents — a bill of lading made out or endorsed to the bank’s order gives control of the cargo at sea, and the moment risk passes under the agreed Incoterms rule, with the documents vesting in the bank, is the point of constructive possession. Marine insurance in the bank’s name is the clearest evidence that the bank, not the customer, would bear the loss.

The price, once set, cannot move

The same logic governs what follows the sale. Once the customer has bought at the agreed cost plus margin, that figure is the price of a completed sale — and a sale price is fixed, whatever becomes of the debt, so there is no rolling over of a Murabahah. While a conventional facility can be renewed for a further charge, a completed sale cannot. A customer needing more financing needs fresh goods and a new sale, not a fee for recycling an old debt.

Restructuring obeys the same rule: the bank may grant more time, but cannot increase the amount owed for it, because that amount is a sale price, not a sum lent. Where a conventional lender would capitalise arrears and add interest, the Islamic bank extends the timetable and absorbs the cost. Even a late-payment charge cannot be kept by the bank (that would turn a penalty on a debt into a profit on it), so it goes to charity, deterring a wilful defaulter without enriching the lender.

Tied to real goods

Picture a Karachi importer buying textile machinery from a European supplier for, say, US$2 million. Rather than lend the importer that sum, the bank makes them its agent to source the machinery and pays the supplier directly. In transit, the bill of lading sits to the bank’s order and the marine cover is in the bank’s name, meaning the bank owns the goods and bears their risk; were the consignment lost at sea, the loss would fall on the bank, not the importer. On arrival, the importer offers to buy the machinery for, say, US$2.12 million — the landed cost plus an agreed profit — payable in equal monthly instalments over the following year. The bank accepts, and only then does the debt become theirs. That figure is fixed: if the importer later struggles, the bank may allow more time, but the US$2.12 million cannot rise by a rupee. The money never touched the importer’s hands, and the bank’s profit was earned on goods it genuinely owned and stood behind.

It is fashionable to dismiss this as ceremony — conventional economics in new clothes — but it is nothing of the kind. The insistence on ownership, risk, possession, and a fixed price ties financing to goods that do indeed move. The supplier is paid for real goods, the bank’s return reflects real risk, and money cannot simply breed more money on its own. For bankers raised on conventional instruments, it asks for a change of instinct — from lender to merchant, from collateral-taker to owner, from charging for time to earning on a sale. That, awkward as it can be, is what lets Islamic trade finance claim to be not merely a permitted alternative but a principled one.