In Islam, all interest is forbidden. However, those living in Muslim countries can still take advantage of bank leverage to purchase assets. This article will discuss the Islamic financial system & how it differs from traditional western finance; specifically how a shariah-compliant loan differs from a traditional loan.
Since interest is forbidden in Islam, banks in Muslim countries cannot offer loans that include interest; even central banks. Instead of charging interest to make their profit, banks in Islamic countries approve loans based on equity. A loan based on equity is much more simple & transparent than a loan based on interest, for many reasons.
When a traditional western bank charges interest on a loan, they are essentially burdening the client with all the risk involved. If a client fails to pay the interest by the due date, there is a penalty, increasing the price of the asset. If the client faces a disaster & misses enough payments consecutively, he might lose his property to the bank; even after making many timely payments. An Islamic bank purchases the asset on your behalf, provided you agree to buy the asset back from the bank in installments.
While it might seem like a small difference whether you are paying interest or installments, the difference is huge. While traditional loans have large penalties for missing interest payments, loans from Islamic banks have very minor penalties for missed installment payments. Since the bank offers to buy on behalf of the client, the installment amount as well as the fees for missed payments are agreed upon in the beginning. This alleviates much of the burden & risk that clients are exposed to in the western financial system.
Similar to western banks, however, Islamic banks also require collateral to approve a loan. This is why most Islamic banks will hold the title to the property until the payment is complete & the contract is fulfilled. However, some Islamic banks will include tenants names in the deed even before the contract has been fulfilled.
Countries like ‘United States of America’ are built on land stolen from Native Americans, yet their citizens are burdened with outrageous interest obligations to become landowners. Once again, western countries need to look at Islamic countries as role models, rather than closing their eyes & covering their ears in hopes that the Muslims will disappear. Many people in western countries like USA get caught up in predatory loans. There is also an outstanding number of homeless people in ‘America’. While offering shariah-compliant loans might not solve the American education problem, it would help clean up the streets. Please share this article with your local bank.
https://www.mortgagefinder.ae/blog/islamic-and-conventional-mortgages-explained/
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