How murabaha pricing works
In a murabaha-based personal financing, the bank buys a commodity or asset and sells it to you at cost plus an agreed profit, payable in instalments. The profit is fixed at the start, and it is usually quoted as a flat annual rate on the original amount. This structure is why Saudi financing adverts often show figures like 'from 2.x% flat'.
Because the profit is calculated on the full amount for every year of the term, while you repay part of it every month, the flat rate understates the effective yearly cost.
What APR adds
The annual percentage rate expresses the cost as a yearly rate on the balance you actually owe, and it includes required fees such as administrative charges. Disclosure requirements are set by the Saudi Central Bank (SAMA); check with your lender or SAMA's current rules, and ask for the APR in writing if it is not shown. It is the right number for comparing banks and finance companies.
A worked comparison
Suppose you finance SAR 100,000 over 5 years at 4% flat. Profit is 100,000 × 4% × 5 = SAR 20,000, so you repay SAR 120,000, or SAR 2,000 a month. The reducing-balance rate that produces SAR 2,000 a month is about 7.4% a year. Add an administrative fee and VAT on that fee, and the APR rises further. So a '4%' offer is really closer to 7–8% in comparable terms.
Quick rule of thumb
For equal monthly payments, the equivalent rate is roughly flat rate × 2n ÷ (n + 1), where n is the number of months. For 60 months that is about 1.97 times. It is an approximation; a calculator solves it exactly.
Why the term matters for the comparison
The gap between the flat profit rate and the APR depends on the term. On a short financing, you repay the principal quickly, so the flat rate and the effective rate are closer in money terms. On longer terms, the gap in total profit paid becomes larger, even if the ratio stays similar. This is one reason why stretching a financing to the maximum term can feel affordable monthly but cost noticeably more overall.
What to ask for in writing
Ask the financier for a written offer showing the financed amount, the term in months, the flat profit rate, the total profit in riyals, the monthly instalment, all fees with VAT, any insurance cost, and the APR. Ask how early settlement is calculated. Current disclosure requirements are set by the Saudi Central Bank (SAMA); check with your lender or SAMA's published rules for what must be disclosed today.
Common misunderstanding
Many people believe a flat rate is the same as the annual cost. It is not; it is the profit per year on the original amount.
How to compare offers
For each offer note the amount, term, flat rate, monthly instalment, admin fee plus VAT, and the APR. Rank by total amount repayable and APR, not by the flat rate. Check early settlement terms too, since the amount of unearned profit rebated on early payoff varies. Our Tamweel calculator, coming soon, is designed to put these side by side.
Frequently asked questions
Why do banks quote the flat rate?
It is the natural way to express a fixed murabaha profit, and it is the traditional market convention.
Is APR required in Saudi Arabia?
Check with your lender or SAMA’s current rules; either way, always ask for it.
Does a lower flat rate always mean a cheaper loan?
Usually, for the same term and fees, but fees and insurance can change the ranking, so compare APR.
Is murabaha profit the same as interest?
It is structured as a sale with an agreed profit rather than a loan with interest, but for comparing costs the APR treats both on the same basis.
Does a longer term lower the APR?
Not necessarily. It lowers the instalment but increases total profit; the APR depends on the flat rate, term and fees together.