Islamic Banks and Personal Lending
As per my previous question on "The difference between Islamic Banks and Western Banks", it was answered that Islamic Banks do not charge interest but instead agree on a percentage of profits the borrower makes with the borrowed funds. Also if the borrower makes a loss with the borrowed funds, then the bank will absorb the full loss.
My question is how do Islamic banks deal with personal loans (for a car, a boat or a holiday)? Do they lend for these purposes, or as there will be no profits made by the borrower will they avoid this type of lending?
The only way I can see personal lending being viable for Islamic Banks is for them to agree with the borrower on a percentage of the amount borrowed to be paid to the bank over and above the original amount borrowed. Is this how it would work?
(2)2 Comments
Sorted by latest first Latest Oldest Best
Islamic Banks do provide consumer financing in the multiple ways, following are some simple models for your consumption:
Auto Finance - Bank purchases a car from the market and leases it to customer on a variable rental rate for a certain time period. In the end Bank sells this car to customer at a nominal price or bank can gift the car to customer as per its own discretion.
Home Finance - Same as auto finance. Or a common structure 'Diminishing Musharaka' is used by majority banks for house finance. You can Google it for more info, as it may take a lot time to write here.
Personal Finance - it is usually an unsecured financing in which customer doesn't have any asset. For example a customer needs 00. He approached bank get the credit approval. Bank buys commodity from a supplier amounting to 00 and sells it to its customer for 00 on deferred payment basis. Customer after obtaining ownership and possession of commodity sells it to a commodity broker and gets the instant cash.
There can be many ways of doing Sharia Compliant transactions.
The basic idea that a lot of Islamic banks use is to buy the personal property for the customer and then sell them back the property (car,boat, house etc.) at a profit and allow the customer to pay for it in installments. It generally comes out to be pretty equal to if the bank had just charged them interest on a loan, but through some legalese it can be Sharia compliant.
Other ways include buy with a lease back provision.
There is a lot of information about both of your questions at en.wikipedia.org/wiki/Islamic_banking
Terms of Use Privacy policy Contact About Cancellation policy © freshhoot.com2025 All Rights reserved.