Risk Mitigation Through ‘Urbun’ In Islamic Finance or the Down-Payment Scheme

UAE Laws and Islamic Finance



‘Urbun’ in Islamic Finance is a down-payment paid by the buyer to the seller giving the right (option) to the buyer to settle the remaining outstanding payment within a prescribed period of time.  The investor can choose not to pay the remaining amount in the prescribed period of time, however, the ‘urbun’ or down-payment is then forfeited.  However, the forfeited down-payment may be less than the decrease in the price of the investment and therefore the ‘urbun’ has the effect of mitigating the loss incurred by the investor in investments.  ‘Urbun’ is accepted in many Sharia’h standards of Murabahah, Ijarah, and Istisna. 

For example, Without ‘Urbun’, an investor in stocks/commodities must pay the full payment price or must have agreed to pay a certain fixed price to the seller to obtain the ownership rights to the stocks/commodities.  If the market price decreases, the investor’s loss is proportionate to…

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