How a researcher in the 1970s connected an obscure medieval legal position to a modern banking puzzle…and unlocked $2 trillion of Islamic finance.
In This Article
- The Post-Colonial Dilemma: A World Built on Interest
- The Classical Foundation
- "I Need Someone to Trade on My Behalf": Murabaha with an Agent
- "I Don't Have All the Cash Right Now": Murabaha with the Seller
- "I Don’t Have the Cash, and the Seller Wants Cash": Murabaha with a Financier
- The Order‑Based Murabaha Solution
- The Synthesis
- The Model: Al‑Murabaha lil‑Amir bi‑Sh‑Shira'
- Why This Was Revolutionary
- From Thesis to Global Standard: The Rise of a Product
- The Unfolding Debate: Scholarly Reservations and the Push for Legitimacy
- The Path to Consensus: Why Murabaha Prevailed
- The Legacy: A Solution in Tension
- Footnotes & Classical Citations
- Related Articles
"We changed the law, my dear brothers and sisters. What we did is huge. We changed the law, alhamdulillah, to accommodate this halal transaction."
A few weeks ago, I happened to be at the Al‑Rashid Mosque in Edmonton when one of its imams, Dr. Mahmoud Omar, sat down for his weekly 'Fatwa Night' to make this special announcement. In a few weeks, he explained, Servus, one of Canada's largest credit unions, would be launching Servus Halal and its Shariah‑compliant home‑financing product.
The law Sh. Mahmoud was referring to was Alberta’s Financial Statutes Amendment Act, 2024 (Bill 32), which revised the Credit Union Act so provincially-regulated lenders like Servus or ATB could briefly hold legal title to a home and resell it to the buyer under a cost-plus contract
Over the 30‑minute session, Sh. Mahmoud explained how this changed everything. As always in Islamic finance discussions, his explanation wove together practical examples, Qurʾanic verses, hadith, and classical legal opinions.
But one line revealed the specific key to the entire modern structure: "Soon, insha'Allah, when you hear that Islamic finance is coming [to Servus], this is the contract that we use - al‑murabaha lil‑amir bi‑sh‑shira'."
This specific financial instrument Sh. Mahmoud referred to isn’t plucked from a classical text. It was engineered in a 500‑page PhD dissertation defended in Cairo in the 1970s.
This is a brief look at the PhD dissertation that birthed a $2 trillion industry and is now being employed as a model by Canada’s largest credit union.
The Post-Colonial Dilemma: A World Built on Interest
As colonial empires retreated in the mid‑20th century, Muslim scholars and economists found themselves at an ideological crossroads. The global economy offered two dominant paths: Western capitalism, fueled by interest‑based finance, and Soviet communism, which suppressed private enterprise altogether.
For Muslims seeking a third way, the 1970s became a decade of urgent innovation.
The Qur'anic prohibition on riba, lending and borrowing with interest, is absolute. Yet the engine of modern economies had made interest‑based transactions the core component of economic life. The global financial system, developed alongside European industrial capitalism over three centuries, was now the foundation of these newly independent economies.
When an individual wished to purchase a good, machinery, or property for which they did not have the cash upfront, conventional finance had a simple solution: borrow money from a lender, acquire the asset, and then pay back the lender with interest over time.
That conventional mortgage structure still dominates home finance today.
Consider Ahmed and Mariam, married engineers in Edmonton today.
They’ve saved $80,000 for a down payment. They've found their dream home near a good school for $400,000. They're $320,000 short.
Under the conventional system, the solution is straightforward: Ahmed and Mariam walk into a bank, receives a $320,000 loan, buy the house, and commit to repaying the bank over 25 years - a sum that will eventually total far more than the original loan.
The difference is the bank's interest.
This transaction undergirds modern finance.
Lending with interest is more than just an incidental aspect of global finance; it is the central transaction that fuels everything, from consumer buying decisions to the very amount of money circulating in the economy.
And this creates a deep dissonance.
How can a Muslim seeking to avoid interest acquire an asset for which they did not have the cash upfront?
The answer, perhaps, lay in models that could be traced back to pre‑modern Muslim marketplaces.
The Classical Foundation
Classical Islamic law categorizes every transaction with precision. Walk through a bustling bazaar, and you'll witness what scholars call bay' al‑musawamah - a negotiated sale. The carpet seller haggles with a customer until they reach a mutually acceptable price. The seller isn't required to reveal his costs; his profit is whatever he can skillfully negotiate. [1]
This is trade in its most raw form.
But there were situations in the classical period where this kind of negotiating wasn’t enough.
"I Need Someone to Trade on My Behalf": Murabaha with an Agent
Picture a wealthy merchant in medieval Damascus who needs rare silk from Aleppo. Unable to make the journey himself, he hires a trusted agent. The agent travels to Aleppo, navigates the markets, and purchases the silk for 1,000 silver dirhams.
Upon returning, the agent presents the silk with full transparency: "My cost was 1,000 dirhams. I will sell it to you for 1,050." That disclosed markup of 50 dirhams represents his fair compensation.
This specific transaction was known as bay' al‑murabaha: a cost‑plus‑profit sale. Because its entire legitimacy rested on the seller’s truthful disclosure of his cost, murabaha belonged to a special category of contracts known as buyu' al‑amanah, or “trust sales.” [3]
It was a tool designed for ensuring fairness and transparency, especially in situations of trust, such as when a more experienced person trades on behalf of one less experienced, or when a guardian manages the assets of an orphan and needs to prove that no secret profit was made at the orphan's expense. [4]
From the outset, jurists treated murabaha as a concession, not a first-choice.
Imam Ahmad called it ‘the narrowest of sales’ because the entire deal rests on the seller’s honesty about cost.
Maliki authorities such as Qadi Iyad said an ordinary haggled sale (bay' al-musawama) is ‘easier, safer and more blessed,’ precisely because it removes the temptation to fudge numbers.
In other words, murabaha was always a pragmatic tool, but never the gold standard of Islamic commerce.
"I Don't Have All the Cash Right Now": Murabaha with the Seller
The classical schools also permitted employing murabaha transactions to purchase things on credit, in a transaction called murabaha mu'ajjalah, or deferred murabaha.
Imagine 9th‑century Baghdad's bustling Suq al‑Ghazl (Yarn Market). A government clerk named Zayd wants to buy fine Isfahani silk from merchant Khalid. The silk costs 10 dinars cash, but Zayd can only pay in six months. Khalid, trusting Zayd's position, agrees to sell for a deferred price of 12 dinars.
Once Khalid delivers the silk, the 12‑dinar amount becomes a fixed debt (dayn) on Zayd. Islamic debt rules now apply strictly and there can be no extra charges for late payments.
The fixed 2‑dinar markup is Khalid's legitimate profit for the item.
This system worked perfectly when the seller was willing and able to extend credit. [5]
"I Don’t Have the Cash, and the Seller Wants Cash": Murabaha with a Financier
But what happened when sellers like Khalid needed immediate payment to restock inventory? What if buyers like Zayd still lacked cash but needed the item today?
In the classical world, a potential solution existed. Zayd might approach a wealthy financier, Mustafa, to facilitate the deal. Mustafa would buy the silk from Khalid for 10 dinars and then resell it to Zayd for 12 on a deferred payment plan.
In his masterpiece, Al‑Umm, the great 9th‑century jurist Imam al‑Shafi'i discussed a case where one person tells another, "Buy this item, and I will give you a profit on it." Al‑Shafi'i ruled that this was permissible, but with a critical condition: the initial promise from the requester was not a legally binding contract. Both parties, he stressed, had to be free to walk away after the financier bought the item. The second sale could only be concluded as a fresh, optional agreement. [7]
This ruling provided a crucial precedent: the form of a third‑party murabaha was Islamically valid. It was a sequence of two sales, not an interest‑bearing loan. However, it left the financier dangerously exposed. In our example, Mustafa would have to buy the silk from Khalid, bearing the full risk of ownership. If Zayd then changed his mind - which he was legally entitled to do under al‑Shafi'i’s framework - Mustafa would be stuck with a bolt of expensive silk he never wanted.
This informal, high‑risk arrangement was precisely the problem that modern Islamic finance needed to solve on an institutional scale.
A modern home seller wants their cash immediately; they have no interest in becoming a 25‑year creditor. A bank must step in as the financier.
But the moment it does, the jurisprudential puzzle intensifies. As a regulated institution, a bank cannot build a business model on optional promises.
How can it protect itself from customers who promise to buy but can legally back out?
The Order‑Based Murabaha Solution
This was the challenge that would consume Dr. Sami Hasan Hamud (1938‑2004), a Jordanian economist then working for the Jordan National Bank. In 1976, he defended his PhD dissertation at Cairo University, Tatwir al‑'Amal al‑Masrafi limuwafaqat al‑Shariah al‑Islamiyyah (Developing Banking Operations to Comply with Islamic Law). [6]
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He recognized that the answer lay not in discarding the classical model, but in solving the critical risk problem that had left it commercially unviable for modern institutions. He later wrote in the introduction to his published thesis:
"The Islamic bank cannot—even if it wished to—be a global warehouse to buy and acquire for sale and purchase everything that comes to people's minds... However, this bank can buy what the person in need requests, according to the circumstances of each individual case."
The Synthesis
Guided by his mentor, the Egyptian jurist Sheikh Muhammad Faraj al‑Sanhuri, Hamud built his solution not on one school of thought, but through a synthesis of two.
He began with the precedent from Imam al‑Shafi'i's Al‑Umm. Recall that Al‑Shafi'i had permitted including a financier in a murabaha transaction, but with a critical condition: the initial promise was not a binding contract. Both parties had to be free to walk away after the first purchase, making the second sale a fresh, optional agreement.[1]
This provided the classical precedent for a two‑stage transaction, but it left the financier perilously exposed. Let’s return to our silk merchants. Mustafa, the financier, could listen to Zayd's request and agree in principle. He could travel to Khalid's shop, pay the 10 dinars, and take legal ownership of the silk. At that moment, the silk is his. He owns it and bears the risk if it’s damaged or stolen.
But what about Zayd's promise to buy it for 12 dinars? According to the strict Shafi'i view, that promise was just... a promise. Zayd could legally walk away. He might find a different bolt of silk he likes better. Or perhaps the price of silk suddenly drops in the market and he knows he can get a better deal elsewhere. In either case, Mustafa is left holding an expensive asset he never intended to own, with no legal recourse to compel Zayd to complete the purchase. This risk—the risk of the non‑binding promise—made the entire model commercially unviable for anyone but the most trusting of financiers.
The true masterstroke of Hamud’s dissertation was connecting this precedent with a nuanced principle from the Maliki school. While promises (wa'd) were generally not legally binding, certain Maliki jurists—most notably Ibn Shubrumah (d. 761 CE)—argued that a unilateral promise could become enforceable (wa'd mulzim) if the promisee had entered into a liability based on that promise.[8]
This was the key that unlocked the puzzle.
Let’s see how this solves Mustafa’s problem. When Zayd makes his promise, it's not just a casual statement. He is explicitly asking Mustafa to undertake a specific action that involves a financial commitment: go and spend 10 dinars to buy this silk. The moment Mustafa acts on that promise and makes the purchase, he has incurred a liability. According to this Maliki interpretation, Zayd’s promise now crystallizes into a legally enforceable obligation. Zayd cannot back out without consequence.
Crucially, the promise remains unilateral. Zayd is bound to buy, but Mustafa is not yet bound to sell. This subtle distinction is vital. A two‑way promise, where both parties are locked in from the start, would constitute a forward contract to sell an unowned asset, which is forbidden. By making only the customer’s promise binding, the structure gives the bank the security it needs without violating the prohibition on selling what one does not own.
The Model: Al‑Murabaha lil‑Amir bi‑Sh‑Shira'
With these classical pillars, Hamud coined the term al‑Murabaha lil‑Amir bi‑Sh‑Shira' (murabaha for the purchase orderer) and laid out a four‑step process:
- The Binding Promise – The customer makes a formal, unilateral promise to purchase a specific asset from the bank on murabaha terms. Following the Maliki principle, this promise becomes legally binding because the bank is about to incur costs based on it.
- The Purchase – The bank, now legally protected, buys the asset from the vendor, taking full legal title and possession (qabd). It now bears the asset's ownership risk.
- The Murabaha Sale – The bank executes a new, separate sale contract with the customer for the pre‑agreed cost‑plus‑profit price, payable in deferred installments.
- The Debt – The outstanding amount becomes a fixed debt (dayn) on the customer, subject to all Islamic rules governing loans—no interest on late payments, no discounts for early payment that resemble selling debt.
Why This Was Revolutionary
This model was legal engineering at its finest. It provided a Shariah‑compliant pathway for modern banking by creating a structure that was formally trade, not lending.
For banks, it mitigated the commercial risk of customer backing out. For customers, it offered access to financing without engaging in riba. Most importantly, it was grounded in classical jurisprudence while fulfilling urgent modern needs.
Let's see how this would work for our friends Ahmed and Mariam in Edmonton:
- Ahmed promises Servus he'll buy the $400,000 house on murabaha terms.
- Servus purchases the house from the seller for $400,000 cash.
- Servus sells the house to Ahmed for $850,000 (their cost plus profit) payable over 25 years.
- Ahmed now owes Servus $770,000 as a fixed debt, payable in monthly instalments of about $2,567.
Structurally, this is trade, not lending. Economically, it achieves the same result as a conventional mortgage.
From Thesis to Global Standard: The Rise of a Product
In the years following Dr. Hamud’s PhD defense in 1976, the world witnessed the birth of the first modern Islamic banks, most notably Dubai Islamic Bank (1975) and the Islamic Development Bank (1975). These fledgling institutions were hungry for Shariah‑compliant products, and Hamud’s murabaha model was the perfect fit. He personally presented his model to these new banks, and by 1978, the Jordan Islamic Bank had adopted it as a core financing tool, where it quickly became the dominant mode of operation.
The idea spread like wildfire, but it needed a formal seal of approval from the religious establishment to gain widespread trust. What followed was a decade‑long, intense intellectual battle that shaped the future of the industry.
The Unfolding Debate: Scholarly Reservations and the Push for Legitimacy
While Dr. Hamud’s model offered a compelling legal solution, its rapid adoption did not go unchallenged. As the practice spread from the late 1970s into the 1980s, a significant counter‑narrative emerged, particularly from prominent jurists in Saudi Arabia and beyond. These scholars, while acknowledging the classical permissibility of a simple murabaha sale, raised deep concerns about its institutionalized, financing‑focused adaptation.
Their reservations struck at the very heart of the transaction's claim to be a legitimate form of trade rather than a disguised form of interest. The criticism coalesced around the binding promise (al‑wa'd al‑mulzim), the first step of the model.
The late Grand Mufti of Saudi Arabia, Sheikh 'Abd al‑'Aziz ibn Baz, consistently maintained that a binding promise rendered the entire structure a mere legal ruse (hilah). In a well‑known fatwa, he stated:
"Murabaha to the purchase orderer, if it involves a binding promise, is not permissible. This is because making the promise binding transforms it into a sale before the bank takes ownership of the commodity, thus it falls under the prohibition of selling what one does not possess."[4]
He argued that the bank, secured by this promise, was no longer a genuine merchant bearing risk, but was effectively a financier guaranteeing its profit. The transaction, in his view, collapsed into "a loan that generates a benefit" (qard jarr naf'an), which is a classic definition of riba.
Other towering figures of the era echoed this sentiment. Shaykh Muhammad ibn Salih al‑Uthaymeen argued that pre‑determining the profit with a binding promise made the transaction substantively identical to a loan with interest.[10] Shaykh Muhammad Nasiruddin al‑Albani was even more direct, famously dismissing the practice as "a juristic trick that presents riba in the form of a sale." [11]
The Path to Consensus: Why Murabaha Prevailed
Despite this formidable opposition, the murabaha model not only survived but thrived. The path to its widespread acceptance was driven by a combination of institutional pragmatism and a series of influential collective fatwas that favored permissibility.
The turning point came at the international Islamic banking conferences of 1979 (Dubai) and 1983 (Kuwait). While individual scholars like Ibn Baz and Uthaymeen maintained their objections, the panels at these conferences—comprising jurists from across the Muslim world—issued majority‑approved fatwas permitting the practice under specific conditions. They argued that as long as the bank genuinely took legal ownership and bore the risk—even for a brief period—the transaction remained a valid sale.
With institutional momentum building, the model needed a juristic heavyweight to enter the ring. That champion emerged in Sheikh Yusuf al-Qaradawi. In his influential 1984 book, Bay' al‑Murabaha lil‑Amir bi‑Sh‑Shira' kama tujrihi al‑Masarif al‑Islamiyyah (Murabaha to the Purchase‑Orderer as Practised by Islamic Banks), al-Qaradawi directly addressed the growing controversy.
He praised Dr. Hamud’s PhD dissertation as a “pioneering and valuable” work but astutely framed it as having tackled the issue primarily from a practical banking perspective. This positioned his own work to provide the missing piece: the exhaustive jurisprudential defense. Systematically dismantling the critics’ arguments, he drew on principles of public good (maslaha) and a deep reading of the sources to argue that as long as the bank took genuine ownership, the transaction remained a valid sale, not a disguised loan. His book became the go-to reference on the topic, and his influential voice was instrumental in cementing the model’s mainstream legitimacy.[12]
The final, authoritative stamp of approval came in December 1988. The International Islamic Fiqh Academy (IIFA)—a prestigious body of jurists representing dozens of Muslim nations—convened its 5th session in Kuwait.
After extensive debate, the Academy passed a landmark resolution declaring murabaha‑to‑the‑purchase‑orderer permissible, officially harmonizing the views of scholars from different legal schools.
The resolution insisted that the bank’s ownership and risk‑bearing must be genuine and unambiguous, and that while a unilateral promise could be legally enforceable, a bilateral promise locking in both parties from the start was forbidden.[13]
With scholarly consensus established, the next step was technical standardization. This fell to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
In 1999, AAOIFI issued Shariah Standard No. 8, a detailed, 60‑clause rulebook that transformed murabaha from a juristic concept into a standardized, auditable, and scalable financial product.[14]
The concept synthesized in a PhD thesis had finally become the engine of a global industry. In 1987, Dr. Hamud was awarded the prestigious Islamic Development Bank Prize in Islamic Banking for his pioneering work. His model was adapted for everything from car financing to trade finance, and its logic even inspired the structure of the multi‑trillion‑dollar sukuk (Islamic bond) market.
By 2024, global Islamic-finance assets had surged past US $5 trillion, and industry surveys still show that cost-plus murabha - Dr. Hamud’s order-based blueprint - accounts for roughly three-quarters of all Islamic-bank financing worldwide.
The Legacy: A Solution in Tension
Looking back, the journey of murabaha is a testament to the dynamic and adaptive nature of Islamic jurisprudence. It began with an urgent, real‑world problem born from the clash of post‑colonial aspirations and a global financial system built on interest. The solution required a deep and respectful engagement with tradition - in the meticulous work of a scholar who connected the dots between an obscure classical rulings to engineer a modern solution.
Dr. Hamud’s model is a work of rigorous research and discourse. It created a formally sound and contractually distinct pathway that allowed for the birth of an entire industry, giving millions of Muslims a choice they never had before.
Yet this triumph also created a lasting tension. As critics like the economist Mahmoud El‑Gamal have argued, while its form is a sale, its economic substance closely mimics an interest‑based loan. The profit rate is often benchmarked to conventional interest rates, and the additional transaction costs can make it more expensive.[15]
This is the complex reality of Islamic finance today. On one hand, it offers a legally distinct, Shariah‑compliant alternative that brings peace of mind to millions. On the other, it operates on the rails of a conventional, interest‑based system—and in many ways must echo it to survive.
When Dr Hamud repackaged murabaha in the 1970s, Islamic legal councils approved it because it worked—but with the same guarded language their predecessors had used a millennium earlier.
The International Fiqh Academy’s 1988 resolution even calls it permissible while urging banks to “move toward partnerships and real risk-sharing whenever possible.”
As classical legal thinkers warned, murahaba solves certain challenges but falls short of Islam’s higher commercial ideals. It remains a valid option for those who need it, but no one should mistake it for the pinnacle of Islamic finance. That tension - useful yet sub-optimal - has been the murabaha story from day one.
But for me, this story is not one of a perfect solution, but of a necessary and brilliant one. It is a story of immense intellectual effort and sincere struggle to carve out a space for faith in a financial world that had no room for it.
The pioneers of this field, like Dr. Hamud, did not have the luxury of building a new system from scratch; they had to work within the one that existed.
The result is an imperfect solution, but a solution born of a deep commitment to principle, nevertheless.
This is Part 1 of a two-part series on Murabaha in Canada. Part 2 will be a review of Servus Halal’s Murabaha home financing option and its implementation.
Footnotes & Classical Citations
- Al-Kasānī, Badāʾiʿ al-Ṣanāʾiʿ fī Tartīb al-Sharāʾiʿ, vol. 5, p. 132. Shamela
- Imam al-Shafi'i, Kitab al-Umm, vol. 3 - Internet Archive
- Wahbah al-Zuhaylī, Al-Fiqh al-Islāmī wa Adillatuhu, vol. 5, p. 3795. Efatwa
- This application is discussed in various classical fiqh manuals in the context of guardianship (wilāyah) over the property of an orphan (māl al-yatīm). See, for example, Ibn Qudāmah, Al-Mughnī, in the chapters on guardianship. Shamela
- This is the consensus position (ijmāʿ) of the four major Sunni schools. For a detailed summary, see Wahbah al-Zuhaylī, Al-Fiqh al-Islāmī wa Adillatuhu, vol. 5, pp. 3804-3806.
- Sami Hasan Hamud, Taṭwīr al-Aʿmāl al-Maṣrifiyya bimā yattafiqu wa-l-Sharīʿah al-Islāmiyya, PhD Dissertation, Cairo University (1976), subsequently published by Dār al-Ittiḥād al-ʿArabī (1982). All subsequent references to classical rulings are based on Hamud's analysis and citations within this work. - moswarat.com
- Hamud cites the ruling of Imām al-Shāfiʿī in Kitāb al-Umm (vol. 3, p. 79) as the foundational precedent for the two-stage sale.
- Hamud's synthesis relies on the Mālikī principle that a promise becomes binding if it induces the promisee to incur a liability (idhā dakhala al-mawʿūd fī kulfah), a view famously championed by Ibn Shubrumah.
- Permanent Committee (Fatawa al-Lajnah al-Da'imah), vol. 13 - islamhouse.com
- Ibn 'Uthaymin, Sharh al-Mumti', vol. 8 - feqhup.com
- Al-Albani, Silsilat al-Huda wa-l-Nur, tape 335 (audio) - Internet Archive (scroll to "335.mp3")
- Yusuf al-Qaradawi, Bay' al-Murabaha li-l-Amir bi-sh-Shira' (1984/87) - noor-book.com
- IIFA Resolution 40-41 (5/5) – 1988 - iifa-aifi.org (see pp. 129-131)
- AAOIFI, Shari'ah Standard No. 8 — Murabaha (2015 compendium) - iefpedia.com (pp. 137-166)
- Mahmoud A. El-Gamal, Islamic Finance: Law, Economics, and Practice (2006) - iefpedia.com
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Written by Farooq Maseehuddin
Farooq Maseehuddin is the founder of MuslimMoney.co, a Canadian platform dedicated to helping Muslims take control of their personal finances.
He teaches across a range of topics including budgeting, investing, financial planning, Islamic inheritance, money conversations in families, and how to teach kids about money—all through both practical tools and traditional Islamic guidance.
Farooq holds a B.Ed. and M.Ed. from the University of Alberta and has spent nearly two decades as a high school teacher and Muslim community organizer.