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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?

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Victor
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2 Answers2

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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 http://en.wikipedia.org/wiki/Islamic_banking

Pablitorun
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Islamic Banks do provide consumer financing in the multiple ways, following are some simple models for your consumption:

  1. 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.

  2. 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.

  3. Personal Finance - it is usually an unsecured financing in which customer doesn't have any asset. For example a customer needs $1000. He approached bank get the credit approval. Bank buys commodity from a supplier amounting to $1000 and sells it to its customer for $1200 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.

Ganesh Sittampalam
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Syed Sitwat
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