Ijarah vs Murabaha: which Islamic home finance structure is which?

Last updated 2 November 2026 · Reviewed by Riyadh Financial Services Compliance

Why are there different Islamic finance structures?

Islamic finance avoids riba, which is any increase charged for lending money for money. Instead, the financier's return has to come from a real asset or a real transaction: rent for the use of property, profit on a genuine sale, or a share in a partnership.

Scholars have developed several contracts that meet these principles. In Australian property finance, the three you'll hear about most are Ijarah, Murabaha and Diminishing Musharakah.

How does Ijarah work?

Ijarah means lease. For home finance, the usual form is Ijarah Muntahia Bittamleek, a lease that ends in ownership. It's the structure our Ijaar home finance uses.

1. The financier takes an interest in the property you choose.
2. You pay rental for the use of the financier's interest, plus payments that reduce the amount financed if you choose Principal and Rental.
3. When all payments are made, the financier's interest passes to you.

With our Ijaar home finance, you're the registered owner on the title from settlement. The financier holds a registered mortgage and a beneficial interest (an ownership share) until all payments are made. The rental rate can be variable, or fixed for a period on selected Ijaar home finance.

How does Murabaha work?

Murabaha means a sale at cost plus an agreed mark-up.

1. The financier buys the asset it has agreed to sell to you.
2. It sells the asset to you at its cost plus a mark-up that's disclosed and agreed at the start.
3. You pay the sale price in instalments over an agreed term.

Because the sale price is agreed upfront, the amount you owe is fixed at the start under a classic Murabaha. Some providers use variations, so read how payments are set in their documents. We don't offer Murabaha.

How does Diminishing Musharakah fit in?

Diminishing Musharakah is a partnership. You (or your fund) and the financier both contribute to the property, and you buy out the financier's share over time while paying for its remaining share.

We use Diminishing Musharakah for Al-Mustaqbal SMSF, which is for self-managed super funds buying commercial property. Our guide to how Islamic home finance works explains it in more detail.

Ijarah, Murabaha and Diminishing Musharakah side by side

• What it is. Ijarah: a lease that ends in ownership. Murabaha: a sale at cost plus a mark-up. Diminishing Musharakah: a partnership that one partner buys out.
• Where the financier's return comes from. Ijarah: rent on its interest in the property. Murabaha: the agreed mark-up on the sale. Diminishing Musharakah: a payment on its remaining share, such as rent or a dividend.
• Can payments change? Ijarah: rental can be variable or fixed for a period. Murabaha: in its classic form, the price is fixed at the start. Diminishing Musharakah: depends on the contract.
• How it's used with us. Ijarah: our Ijaar home finance for residential and commercial property. Murabaha: not offered. Diminishing Musharakah: Al-Mustaqbal SMSF.

Which structure is better?

There's no single answer. Each structure is accepted by many scholars when it's properly documented and followed in practice, and each suits different needs.

Questions that can help you compare:

• Is the return linked to a real asset or sale? Ask the provider to explain where its return comes from.
• How are payments set, and can they change over the term?
• Who is on the title, and when does full ownership pass to you?
• What happens if you pay out early, sell, or have trouble making payments?
• Who reviews the product, and can you see the current Shariah certificate?
• What's the total cost, including fees, not just the rate?

We explain how our structures work, but we don't give religious rulings. You're always welcome to seek your own scholar's view.

General information only. It isn't financial, tax or religious advice and doesn't consider your objectives, financial situation or needs. Fees, charges and credit criteria apply.