How do Muslim banks work?I know they cannot charge interest, So do they just charge fees instead or is there more to it? | |
How do Muslim banks work?I know they cannot charge interest, So do they just charge fees instead or is there more to it? | |
Basic principles of Islamic banking:
1-Any predetermined payment over and above the actual amount of principal is prohibited
2-The banking system is based on the concept of profit and loss sharing.
3-The lender must share in the profits or losses arising out of the enterprise for which the money was lent.
4-Making money from money is Islamically unacceptable. (Riba or interests are strictly forbidden,there are no fees or anything similar)
5-Gharar (Uncertainty, Risk or Speculation) is also prohibited.
6-Investments should only support practices or products that are not forbidden
Instead of loaning the buyer money to purchase the item, a bank might also buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank's profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha.
There's also an innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa (Diminishing Partnership), allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank's share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party's current equity
There are various ways they get around it, but I don't have the details in front of me.