Borrowing Islamic
The basic principal of conventional Western banking is the charging of interest on loans – the borrower has to pay for the right to access some of the lender’s money, usually as a percentage of the amount borrowed, and that provides the bank’s profit.

This procedure is explicitly prohibited by Shariah, the body of Islamic religious law. There are practical difficulties in raising capital for major business and personal expenses without the convention of interest-charging, however, and in comparatively recent times a Shariah-compliant form of banking has developed to fill the need.
Islamic banking has the same purpose as conventional banking – money is made available for those who need it – except that it operates in accordance with the Shariah rules known as Fiqh al-Muamalat.  The basic principle of Islamic banking is that profit and loss are shared, and there is no additional payment made for the simple provision of money.
Now, it could be argued that charging rent or making a profit (which are acceptable under Shariah) is no different to charging interest (which isn’t). After all, in both cases the lender makes money from lending money. But the issue isn’t with making money per se, it’s the way that money is made. Interest is prohibited, rent or profit are not.
One common method of home financing is called Murabaha. With a Western-style mortgage, a bank would lend the buyer money to purchase the property. With a Murabaha plan the bank itself would buy the property from the seller and then resell it at a profit to the buyer; as with the Western mortgage, the buyer repays the bank in instalments that contain a premium – but the premium represents the additional profit that the bank is making, rather than interest that it is charging.
The prohibition of Riba (charging interest, or more generally making money from lending money) means that the profit element of an Islamic mortgage cannot be made explicit. The mortgaged property is normally registered to the buyer right from the start of the transaction, so ownership effectively passes in quick succession from the original seller to the bank to the buyer. The buyer pays fixed monthly repayments over a fixed term based on the bank’s price, which includes the profit but has no interest component.
Some banks have another option for home loans. Musharaka is a joint venture between the lender and the purchaser, both of whom provide capital in an agreed proportion to purchase the property (obviously the bulk comes from the bank, the buyer contributing the equivalent of a deposit). The partnership then rents the property to the borrower and the proceeds from the rent are shared on the basis of the equity split. At the same time, the borrower also buys the bank’s share on the property via a schedule of agreed instalments; when the final instalment is paid, the borrower will have 100 percent of the equity and the partnership is ended.
So if the buyer puts down 10 percent of the purchase price, the bank will buy the remaining 90 percent. The buyer pays a monthly rent on the share they don’t own while also buying more shares in the property with each monthly payment. The more shares they own, the less rent they pay to the bank; and the cost of a share in the property is based on the property’s original cost price, not its current market value. The knowledge that every month you are increasing your share of the property while sharing all risks with the bank can be very reassuring to the buyer.
If the buyer defaults, the property is sold and both partners – the bank and the borrower—receive a proportionate share of the proceeds at current market value.
An alternative approach, Ijara or Eijara, is a lease-to-own plan. The bank purchases the property then leases it to the buyer until the loan is fully paid off. The bank retains ownership until that point. This can be used for property purchase, and it’s likely to be used for vehicle loans and other capital purchases too.






[Originally published in Abu Dhabi Week vol 2 issue 18]