The 25-year-old international scored 17 goals in 23 games with Al Hilal last season after having previously played in Ligue 1 with Caen.
El Arabi is one of a host of new signings by the Andalucian side who have been one of the busiest Spanish clubs in the closed season so far.
Granada returned to the top-flight after a 35-year absence in 2011 and avoided relegation on the final day of the season back in May.
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