Murabahah financing under the Romanian law​

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1. Introduction

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The growing commercial relationship between Romania and the Gulf Cooperation Council (GCC) states has generated increasing interest in Islamic finance. Romanian companies engaged in cross-border trade, infrastructure projects, real estate development and investment transactions are progressively encountering financing structures developed in accordance with Shariah principles. Among these, Murabaha remains by far the most relevant instrument, representing a significant proportion of Islamic banking assets worldwide.

Despite its prevalence in international Islamic finance, Murabaha is frequently perceived by Romanian practitioners as an unfamiliar or even incompatible legal concept. This perception is understandable. Romanian banking practice has traditionally been built around conventional credit agreements, in which the lender advances funds and receives remuneration in the form of interest. Murabaha, by contrast, deliberately avoids interest (riba) and instead structures financing through successive contracts of sale.

From a comparative law perspective, however, Murabaha is considerably less exotic than its religious origins might suggest. Once the theological dimension is distinguished from its legal mechanics, the transaction reveals itself as a carefully structured commercial sale supported by contractual techniques that are already well known to civil law jurisdictions.

Romanian law contains no legislation specifically governing Islamic finance. Nor does it recognise Murabaha as a distinct nominate contract. Yet this absence of express regulation does not necessarily prevent its implementation. On the contrary, the Romanian Civil Code is founded upon the principle of contractual freedom, allowing parties to organise their commercial relationships according to their own economic objectives provided that mandatory legal rules, public order and good morals are respected.

The question, therefore, is not whether Romanian law recognises Murabaha by name. The more relevant question is whether Romanian private law already provides sufficient legal mechanisms to accommodate its structure.

This article argues that the answer is largely affirmative. Although Murabaha originates from Islamic jurisprudence, its legal architecture corresponds remarkably well with several institutions already recognised under Romanian law, including sales with deferred payment, promises to contract, agency relationships and security interests. The principal challenge resides not in the validity of the contractual structure itself, but in preserving those characteristics that distinguish Murabaha from a conventional credit transaction.

 

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2. Understanding Murabaha: financing through trade rather than lending

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Murabaha is frequently described as an "Islamic financing instrument". While this description is commercially accurate, it can also be misleading from a legal perspective. Unlike a loan agreement, Murabaha is not a financing contract in the traditional civil law sense. Rather, it is a transaction consisting of two separate sales.

The AAOIFI Shariah Standard No. 8 defines Murabaha as a sale whereby the seller discloses to the purchaser both the acquisition cost of the asset and the profit added to that cost. In contemporary banking practice, the seller is the financial institution, while the purchaser is the customer seeking financing.

The transaction generally unfolds in three distinct stages.

First, the customer identifies an asset that he wishes to acquire and requests the financial institution to purchase it on his behalf. At this preliminary stage, no sale has yet taken place. The customer merely expresses an intention or, depending on the documentation, gives a unilateral promise to purchase the asset once the institution has acquired ownership.

Secondly, the financial institution purchases the asset from an independent supplier in its own name and for its own account. During this period, however brief, the institution becomes the legal owner of the asset and bears the corresponding risks associated with ownership.

Only after ownership has been acquired does the third stage occur. The institution resells the asset to the customer at the stated acquisition cost plus a previously agreed profit margin, with payment commonly deferred over an agreed schedule of instalments.

This sequence is not simply procedural. It represents the defining legal characteristic of Murabaha.

The AAOIFI Standard expressly prohibits the institution from selling an asset before it has acquired ownership and possession. Likewise, the institution must genuinely assume the commercial risks attached to ownership before transferring the asset to the customer.

From the perspective of Islamic jurisprudence, this requirement distinguishes legitimate trade from disguised lending. From the perspective of Romanian private law, it equally demonstrates that the financier is not simply advancing money but participating in an authentic commercial transaction.

 

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3. The economic substance of Murabaha

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It is tempting to regard Murabaha simply as a loan under another name. Economically, after all, the customer ultimately acquires an asset while paying a higher amount over time. Yet legal systems have long recognised that transactions producing similar economic outcomes may nevertheless belong to different legal categories.

A mortgage loan enables a purchaser to acquire real estate through borrowed funds. A financial lease similarly allows the user to obtain possession of an asset while making periodic payments. A sale with deferred payment also permits acquisition absent immediate payment of the purchase price. Although these arrangements may attain similar commercial objectives, each is governed by different legal rules because each allocates ownership, risk and contractual obligations differently.

Murabaha belongs within this broader family of asset-based financing rather than conventional lending. The financier's remuneration does not arise because money has been made available for a period of time. Instead, it derives from a genuine sale transaction in which the financier acquires ownership of an asset before transferring it to the customer at an agreed mark-up. This distinction is fundamental.

Under a conventional loan agreement, interest accrues as compensation for the use of capital. Under Murabaha, the customer's obligation is simply to pay the agreed purchase price of the asset. That purchase price happens to include the financier's profit, but once fixed, it does not fluctuate according to the passage of time.

For this reason, the AAOIFI Standard requires both the acquisition cost and the profit margin to be fully disclosed at the moment the Murabaha contract is concluded. The selling price must be fixed and known to both parties and may not subsequently increase merely because payment is deferred or because the customer delays payment.

This approach diverges distinctly from conventional banking practice, where interest generally continues to accrue until repayment.

 

 

4. Does Romanian Law permit such a structure?

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From the perspective of Romanian law, the answer should begin not with banking legislation but with the general principles of private law. The Romanian Civil Code adopts a broad conception of contractual autonomy. Parties are generally free to determine both the legal form and the economic substance of their contractual relationships, provided that mandatory legal provisions are respected. Such flexibility has long enabled commercial actors to develop contractual structures that do not match exactly with any nominate contract regulated by the Civil Code.

Murabaha comfortably fits within this tradition. Nothing in Romanian law requires financing to be structured exclusively through a loan agreement. Nor does Romanian law prohibit a financial institution from purchasing an asset and subsequently reselling it at a higher price on deferred payment terms.

Indeed, Romanian commercial practice already uses a variety of transactions founded upon precisely this economic logic. Suppliers routinely sell equipment under deferred payment arrangements. Developers transfer ownership of real estate while accepting payment in instalments. Automobile distributors offer manufacturer-backed financing that frequently resembles a sale with deferred payment more closely than a traditional loan.

The fact that Murabaha is motivated by compliance with Shariah principles does not alter its legal character under Romanian law. The Civil Code is concerned not with the religious motivation of the parties but with the validity of their contractual arrangements.

Consequently, provided that the financier genuinely acquires ownership, bears ownership risks before resale and concludes a separate sale contract with the customer, there appears to be no conceptual obstacle preventing Murabaha from operating within Romanian private law.

The real legal analysis therefore lies elsewhere: not in asking whether Murabaha is permissible, but in determining which Romanian legal institutions most closely correspond to its individual components and whether any elements of the AAOIFI Standard create tensions with Romanian mandatory rules.

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5. Murabaha through the lens of Romanian Civil Law

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The compatibility of Murabaha with Romanian law cannot be assessed by searching for an identical legal institution. Romanian legislation, like that of most European jurisdictions, does not regulate Islamic finance as a separate branch of law. Instead, the relevant question is whether the legal elements composing a Murabaha transaction are recognized individually by Romanian private law.

Viewed in this manner, Murabaha appears far less foreign than its terminology might suggest. Its principal components, successive sales, unilateral promises, agency relationships, deferred payment mechanisms and security arrangements, are all familiar concepts under the Romanian Civil Code. What distinguishes Murabaha is not the novelty of its legal tools, but the manner in which they are combined to comply with Shariah principles.

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Sale with deferred payment: the closest Romanian equivalent

The legal institution that most closely resembles Murabaha is the ordinary sale with deferred payment. Romanian law has never required payment of the purchase price to coincide with the transfer of ownership. Parties remain free to agree that ownership will pass immediately while payment is made over several months or years. Commercial practice frequently employs such arrangements in transactions involving machinery, industrial equipment, vehicles and real estate.

In both Murabaha and a deferred payment sale, the seller's remuneration forms part of the purchase price itself. Unlike a loan, where compensation takes the form of interest accruing over time, the seller's commercial gain is embedded within the agreed selling price. This distinction has important legal consequences.

Once the Murabaha sale has been concluded, the customer's obligation is to pay the agreed price. The price is not recalculated according to market conditions, reference interest rates or the passage of time. The AAOIFI Standard requires both the first acquisition cost and the seller's profit to be known and fixed when the contract is concluded and expressly prohibits any mechanism under which the profit varies by reference to future indicators such as LIBOR.

Romanian law presents no obstacle to such pricing. The Civil Code allows parties to determine the purchase price freely, provided that it is determinable and agreed by the parties. Nothing prevents the parties from agreeing upon a fixed selling price that incorporates the seller's expected commercial return from the outset.

Accordingly, the principal legal distinction between Murabaha and an ordinary deferred payment sale does not lie in the pricing mechanism but in the requirement that the financier first acquires ownership of the asset before selling it.

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The Customer's promise to purchase

One of the more distinctive features of Murabaha concerns the preliminary promise given by the customer. Before the financial institution purchases the requested asset, the customer generally undertakes to acquire it once the institution has become owner. This protects the institution from acquiring assets that may subsequently remain unsold.

However, the AAOIFI Standard draws a careful distinction between a promise and the sale itself. The promise exists only to facilitate the future transaction; it must not itself constitute the Murabaha contract. For this reason, the Standard discourages binding bilateral promises that effectively eliminate the interval between acquisition and resale, except where either party retains a contractual right to withdraw. The promise and the sale must remain legally distinct stages of the transaction.

Romanian law already recognises this distinction through the institution of the promise to contract (promisiunea unilaterală and promisiunea bilaterală de a contracta). The Civil Code distinguishes between a promise to conclude a future agreement and the agreement itself. Ownership is not transferred merely because one party has promised to enter into a forthcoming sale. Rather, a separate sale contract is still necessary.

Consequently, the preliminary documentation used in Murabaha could readily be accommodated through Romanian rules governing promises to contract. The customer's undertaking would function precisely as intended under the AAOIFI Standard: it would provide commercial certainty without replacing the future sale.

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Ownership must pass through the financier

Perhaps the most important legal feature of Murabaha is frequently overlooked by practitioners approaching Islamic finance for the first time. The financier cannot simply provide funds enabling the customer to purchase the asset directly from the supplier. Instead, ownership must genuinely pass through the financier.

This requirement is not simply formalistic. It serves to distinguish trade from lending. The AAOIFI Standard therefore prohibits the institution from selling an asset before acquiring ownership and either actual or constructive possession. Romanian law readily accommodates this sequence.

Nothing prevents a financial institution from purchasing an asset from a supplier and immediately reselling it to a third party. Commercial intermediaries routinely perform precisely this function.

Indeed, successive transfers of ownership occur daily in distribution chains without giving rise to legal difficulty. Murabaha simply places the financial institution within that chain of title for financing purposes.

The critical issue is that the intermediary's ownership must be genuine rather than merely documentary. If the customer contracts directly with the supplier while the institution merely advances the purchase price, the transaction may cease to resemble a sale and instead acquire the legal characteristics of a financing agreement.

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Ownership risk and commercial reality

Closely connected with ownership is the allocation of commercial risk. One of the central principles of Islamic finance is that profit should be associated with risk. Accordingly, the AAOIFI Standard requires the financial institution to assume the risks associated with ownership during the period between acquisition from the supplier and resale to the customer. Although this interval is often brief, it cannot be purely fictional.

Romanian law reaches a comparable conclusion through ordinary rules governing ownership. Ownership ordinarily entails both rights and responsibilities. A purchaser acquiring title generally assumes the risks attached to ownership unless the parties validly agree otherwise. Consequently, if the financier becomes owner, Romanian law likewise expects it to bear the legal consequences associated with that ownership.

Far from creating inconsistency between the two legal systems, this requirement illustrates an area of substantial convergence.

 

Agency arrangements

Modern commercial transactions frequently require practical flexibility. Rather than collecting equipment personally from a manufacturer located abroad, a financial institution may appoint another person to complete the acquisition on its behalf.

The AAOIFI Standard permits such agency arrangements but approaches them carefully. The preferred position is that the institution itself acquires the asset directly. The customer should act as purchasing agent only where necessary, and safeguards should ensure that ownership genuinely passes to the institution before the Murabaha sale takes place.

Romanian law contains a well-developed law of mandate that readily accommodates these arrangements. The financier may authorise an agent to conclude contracts, receive delivery and perform legal acts in its name. Nothing in Romanian law prevents the customer from acting simultaneously as agent during the acquisition stage and purchaser during the subsequent resale, provided the contractual documentation clearly separates these separate legal capacities.

From a drafting perspective, maintaining this separation is essential. Combining both roles within a single contractual act could create uncertainty as to whether the financier ever became the true owner of the asset.

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Murabaha and financial leasing: similar objectives, different legal structures

Murabaha is sometimes compared with financial leasing because both arrangements enable customers to acquire valuable assets without making immediate full payment. The comparison is understandable but ultimately incomplete.

Under a financial lease, ownership generally remains with the lessor throughout the leasing period. The lessee acquires only possession and contractual rights of use, while ownership usually transfers, if at all, only after the purchase option is exercised. Murabaha follows a different logic.

Ownership passes to the customer immediately upon the Murabaha sale. What remains outstanding is merely the customer's obligation to pay the agreed purchase price over time. Consequently, Murabaha should be viewed as a deferred sale rather than a lease.

This distinction has real effects for insolvency, taxation and the enforcement of security interests.

 

Security for payment

Like any commercial seller extending credit, the Murabaha financier requires assurance that the deferred purchase price will ultimately be paid. The AAOIFI Standard therefore permits a broad range of security mechanisms, including mortgages, guarantees, promissory notes and acceleration clauses. At the same time, it prohibits contractual provisions designed to generate additional profit merely because payment is delayed. Instead, security serves only to ensure recovery of the existing debt.

Romanian law already provides a well-developed framework for achieving precisely these objectives. The Civil Code allows obligations to be secured through movable and immovable mortgages, fiduciary guarantees, personal guarantees and negotiable instruments. These mechanisms can secure payment of the Murabaha purchase price without altering the legal character of the underlying sale.

The only aspect calling for careful adaptation concerns default remuneration. Whereas Romanian commercial contracts commonly provide for default interest, a Shariah-compliant Murabaha structure would ordinarily avoid additional amounts payable for the financier's benefit solely because of delay. Instead, the parties would rely primarily on acceleration clauses, enforcement of security and other contractual remedies recognised by Romanian law.

 

 

6. Areas where Romanian law and the AAOIFI Standard diverge

 

a. Default interest: Romanian law permits parties to agree on contractual default interest, and statutory default interest applies in commercial matters. By contrast, the AAOIFI Standard prohibits any increase in the debt solely because payment is late. This is perhaps the most significant conceptual difference between the two systems.

b. Retention of title: The AAOIFI Standard does not allow ownership to remain with the financier until the purchase price has been paid in full, whereas Romanian law generally permits reservation of title clauses (pactum reservati dominii). This raises interesting drafting questions for Shariah-compliant transactions.

c. Consumer credit rules: Even if a Murabaha is legally structured as a sale, regulators or courts may examine its economic substance when consumer protection legislation applies.

d. Tax considerations: VAT can be more complex than under a conventional loan because Murabaha involves two genuine transfers of goods. While the article should not become a tax treatise, it should alert readers to this practical issue.

 

 

7. Could Murabaha already be implemented by Romanian banks?

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The answer is essentially yes, but only if the documentation is carefully structured. The section would explain that a Romanian bank could implement Murabaha by making sure that:

1. the customer requests the bank to purchase the asset;

2. the bank purchases the asset in its own name;

3. ownership genuinely passes to the bank;

4. the bank bears ownership risk, however briefly;

5. the bank then enters into a separate sale agreement with the customer;

6. the purchase price is fixed and disclosed;

7. no additional amount becomes payable merely because time passes or payment is delayed.

This would demonstrate that no special "Islamic Banking Act" is needed.

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The Romanian Civil Code does not simply tolerate Murabaha; in many respects, it already provides the legal vocabulary necessary to implement it. The similarities are not accidental. Both legal systems recognise the distinction between a sale and a loan, both require genuine transfers of ownership where a sale is claimed to exist, and both acknowledge that parties enjoy considerable freedom in structuring commercial transactions.

The remaining questions therefore concern not the validity of Murabaha itself, but the practical issues arising once such transactions intersect with banking regulation, tax law, consumer protection rules and insolvency proceedings.

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Platform Lead: Casiana Dusa - President of RAIH

casiana.dusa@islamicbusinessromania.com

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