By :
William King
You learn in your economics course that the banks borrow cheaply from the depositor and lend at a higher rate to the borrower and the difference between the two allows them to run a profitable business. It is a way to make more money from money and sometimes it is not even on paper and is often not even connected to a physical asset. The demand-supply gap will be the larger, the greater the efficiency and credibility of the bank, which in turn will make the business even more profitable. Islamic banking runs on a very different principle.
The first difference which exists between ordinary banking and Islamic banking is that the object associated with the contract must actually exist, be specific and free from all ambiguities and it also must be permitted by the Sharia’h. This implies that the bank cannot lend money to anyone but may make an investment. All features of a Muslim’s life is embraced by the religion of Islam and this includes the way its business dealings and finance are carried out. This means, in effect, that mortgage products are not acceptable for Muslims. In Muslim countries, Islamic banks and religious scholars has thought of a number of ways by which to offer finance and banking which can be permitted by Islamic law. Ijara and Murabha are considered by religious scholars and Islamic banks to be the most suitable methods of finance for the purchase of property in the United Kingdom.
Ijara - In the Ijara method of finance, the financier purchases the property and sells it to the customer for the same amount of money, with the payment spread over a period of time agreed between them. The customer also has to pay rent to the financier over the repayment term. The installment of the purchase is somewhat like the capital payments under a conventional loan, while the interest in the conventional loan is like the rent in the Ijara.
Murabha - In the Murabha method of finance, the financier purchases the property and immediately sells it to the customer at a higher price. The higher price is settled based on the number of years allowed by the financer to the customer to pay the purchase price. The extra sum can be compared to the interest which is charged on a conventional loan at a certain rate over the whole payment term.
An ethical dilemma is faced by about two million Muslims in the UK when they want a loan or a mortgage as conventional loans and mortgages all need the payment of interest and ‘riba’ (interest in Islamic law) is not allowed by the Koran.
Under Ijara, the bank will buy the asset you want and you will be allowed to use the asset for an agreed period in return for a monthly payment which covers the bank’s capital. It is a kind of leasing.
In Musharaka (meaning partnership), the bank buys the asset and becomes the legal owner. You pay monthly installments, covering part of the rent and part of the cost of the asset, so that after a pre-determined period, you own the asset itself.
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