Islamic Loan & Shariah Compliant Financing

Shariah Rules Regarding Halal Loans

Loan may be in any form that is in cash or in commodity, it may be big or small, it may be for personal needs of the debtor or for purpose of business, the Islamic loans shall be given without interest.

• Since the verbal agreements regarding loans lead to disputes, Islam has made it obligatory on both creditor and debtor to bring the contract of debt into writing in the presence of two witnesses, and settle terms and conditions regarding its repayment.
• According to a Hadith, whoever takes a loan, with an intention of not returning it, is a thief.
• A debtor is eligible for Zakath for discharging the burden of his debt.

1. Duties of Debtor

• Islamic loan should be incurred only when it is unavoidable. It may be incurred to satisfy basic needs, or to discharge an essential responsibility.
• In no case, Shairah compliant loans should be contracted for unlawful purposes, or for luxurious living.
• Contract of Shariah compliant financing should be reduced in writing, in the presence of two witnesses.
• The debtor has the right to give dictation to the scribe when the contract of Islamic loans is being written.
• Debt should be taken with a clear intention to pay it back.
• If a creditor demands for some security in shape of property or asset, the debtor is bound to provide the same.
• Debtor should pay back the Islamic loans promptly, on the promised date or earlier.
• The debtor is duty-bound to clear his debts before his death. Otherwise, his legal heirs should clear the debts or Shariah-compliant loans.

2. Duties of the Creditors

• Shariah lending should be advanced to a genuinely needy person, who requires the loan for genuine needs.
• When a creditor lends money to someone, he should make a contract in writing with the debtor, settling terms and conditions of Shariah compliant loan, and the time for its return.
• If the debtor has become insolvent and is not in a position to pay back the loan, the creditor is enjoined upon to remit the debt. It is an act of great virtue and it carries many rewards.
• If the debtor is not able to make full payment, the creditor shall accept payment in installments.
• Creditor is allowed to use harsh words in case of a solvent debtor, who does not repay the loan despite persistent demand. But still he is instructed not to lose his cool. He should kindly treat his debtor and should not injure dignity of the debtor.

Role of Bait-ul-Maal in Providing Halal Loans

The Public Treasury in an Islamic state is called Bait-ul-Maal and it provides Shariah compliant loans to needy people of the society.

For Example:

• Halal loans are provided to people would do their business with whatever capital and economic sources they have, and they would not be generally too ambitious to expand it with borrowed capital.

The state would need hardly any Islamic loan, but if it fails to raise funds and the need is dire, it can resort to borrowing. However, Islamic lending should be restricted to need only, and loans should be raised, preferably from brother Muslim countries, free of interest.

Types of Shariah Complaint Financing

There are several forms of Shariah compliant loans offered in Islamic banking and finance (see what is Islamic banking for details), and they are in the form of Shariah compliant financing. Banks may offer financing opportunities for their customer to purchase through which they can have access to funds without involving in riba. However, it is not only for the basic need, and NOT for luxuries or investments, even in the Islamic capital market products.

Following are just a few examples of Shariah compliant financing, offered by Islamic banks and other financial institutions:

1. Shariah Complaint Home Financing

Some Islamic banks offer a lease-to-purchase (ijarah wa iqtina) concept for the purpose of Islamic home financing or Islamic/halal mortgage. They also may assist their customers in getting good deals for the real estate they may be purchasing. With the elements of systems of Murabahah, Ijarah contract, or any type of Musharaka financing, customers may be able to avail their Islamic bank services to be able to buy housing properties.

2. Shariah Compliant Business Financing

A lease-to-purchase concept for this form of Islamic loans would be employed where the bank and the customer would jointly invest in a business. With time, at a rate calculated according to the Islamic lease, the customer would pay the bank back. Another form of business financing, and a relatively more common one, is where such an institution and the customer would invest in a business together and then share the profits generated within the business.

3. Equipment Financing

Shariah compliant loans for the purchase of equipment is done by the bank or institution on a manner similar to the aforementioned methods. The bank and the customer both research the cost of the equipment in the market and mark it accordingly. The two parties may then purchase the property jointly and the customer may make a repayment for capital in the future.

4. Islamic Loans for Construction

In this case, the Islamic institution and the customer may hold the right to an in-progress home together while maintaining a culture of profit and loss sharing. This form of sharing profit and loss is deep-rooted in the principles of Islamic financing and is, therefore, a method adopted by Islamic banks and institutions. This shariah loan option however, has a limited availability worldwide at the moment since customers are hesitant to avail it.

5 Key Differences Between Halal Loans and Conventional Loans

1. Riba

Conventional loans typically involve the payment of interest or usury (riba) and which is prohibited in the sources of Islamic law.

2. Risk Sharing

In a conventional loan, the borrower bears the financial risk. If the borrower defaults, the lender can claim collateral. However, in Islamic loans, risk is shared between the lender and the borrower according to the risk management rules for Islamic banking and finance.

3. Asset-Backed

Conventional loans can be granted for any purpose and are not necessarily backed by assets. On the other hand, Islamic finance offers asset-backed.

4. Ethical Investing

Conventional finance does not observe specific ethical guidelines, whereas Halal loans follow the Shariah principles. Shariah lending is given only to socially responsible and ethical businesses.

5. Contract

The contract in conventional financing is usually straightforward involving the loan amount and the interest rate. However, halal loans are given on the basis of Shariah complaint Islamic financial products such as Murabahah, Musharakah, Diminishing Musharakah, Ijarah, Salam, and Istisna Contract.

Shariah Compliant Lending: Benefits and Challenges

In a worldwide economy where this enthusiasm for Shariah lending is quickly growing, it is justified regardless of the exertion considering the merits and the demerits of the monetary worldview of Islamic financial matters. The leap forward of Islamic account in the late twentieth century was no occurrence. Recent studies have evaluated an aggregate total asset of about $3 trillion coursing through the Islamic finance system. With growing rates of Shariah compliant lending from 13 to 22%, making it the quickest developing segment in the finance industry, its significance does not appear to be any less major in the foreseeable future.

Moral Nature of Shariah Lending

• Islamic money has yet been praised for its moral nature, which adds to social equity as well as stipends the saving money industry a superior picture. Most importantly, Islamic fund is accepted to be a lower risk financing component than the current ordinary.
• Then again, the substance of Islamic fund has been condemned for being somewhat wasteful and discriminatory, having no genuine included worth as far as monetary advancement or purchaser welfare.

Shariah Lending Growth in Muslim and Non-Muslim Countries?

Here are the top 5 reasons why Sharia compliant lending is on the rise in non-Muslim countries:

1. Growth

The popularity and growth of Sharia compliant lending is forecasted to grow at an unprecedented rate. Unusually high rates of growth have made it more popular and people are now looking at is authenticity and viability very closely.

Muslim Demands

The Muslim population in non-Muslim countries is ever growing. Hence, the need for Islamic finance in those areas. The Muslim community wants to operate under the Shariah and because of that must engage in Shariah compliant lending rather than conventional lending.

Globalization

The globalization of international markets demands that every method of finance be incorporated into the running of the market. The world is now one big marketplace and the Muslim population is one major buyer and seller. Thus to satisfy their needs and wants, non-Muslim countries are increasing their focus on Islamic finance.

Co-Existance

Many non-Muslim countries are of the opinion that both Islamic finance and conventional banking can co-exist. Although there are many differences between Islamic and conventional banking, they don’t see Islamic finance as a competition rather they see it as an opportunity to increase their customer base of which Muslims are a significant part.

The Middle-East Influence

Another major reason why Islamic lending is on the rise is the simple matter of the fact that the Gulf States have retained their dominance over majority of the world’s oil. The Gulf States sternly believe in trading according to the sharia law and want Islamic finance to be incorporated in their every dealing.

Final Words

• All in all, Islamic lending or halal loans has seen a significant rise in its use and popularity not just in Islamic countries but also non-Muslim countries. This has been proven by London’s positive stance and increased use regarding Islamic finance.
• All Islamic loans options may serve different purposes but have the laws of Islam at the heart of them. Shariah compliant loans have also been proven to be beneficial overall for all parties involved as opposed to conventional forms of loan functioning through a culture of interest.
• Considering the history of Islamic banking and finance, the Islamic banking system must be based on gold standard. However, its practical implementation will take time. Many non-Muslims are still unaware of its existence and terms of use, but that number is slowly decreasing.
• All of these reasons are why Islamic finance is gaining influence and is predicted to do so at even a higher rate in the foreseeable future. With the growth of the Islamic banking and finance industry, demand for Islamic finance education is also growing.
• Considering this demand, AIMS designed diploma in Islamic banking and finance and Islamic banking and finance courses, which students and professionals may attend 100% online from any part of the world.
• AIMS offers great educational programs for those willing to start their career in top-tier Islamic financial institutions, the MBA in Islamic and finance degree, and a research-based online PhD Islamic finance and economics.