What is an Islamic Loan?
Islamic banking is a system of banking that follows Islamic principles and guidelines. Majority of Muslims prefer this form of banking because it complies with the fundamental principles of Islamic law, Shariah. A component of Islamic banking is therefore offers shariah compliant financing. As the name indicates, a shariah compliant loans are literally loans taken and given on the basis of rules and guidelines set out by Shariah. Islamic loan differs from conventional forms of loans essentially because it eradicates the element of interest (riba). This is because, as per the Islamic belief system, interest is forbidden or ‘Haram’.
Duties of the Creditors:
- Islamic loans 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.
Perspective of Shariah Compliant Financing:
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 examples: Islamic 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 the state fails to raise funds and the need is dire, it can resort to borrowing. However, the borrowing should be restricted to need only, and loans should be raised preferably from brother Muslim countries, free of interest.
Forms of Islamic Loans Offered by Islamic Bank:
There are several forms of Shariah compliant loans offered by Islamic banks and institutions, 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 partaking in a system of interest. 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:
Some Islamic banks offer a lease-to-purchase (ijarah wa iqtina) concept for the purpose of home financing. 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, Ijara, or Musharaka, customers may be able to avail their banks services to be able to buy housing properties.
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 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.
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.
Islamic Loans for Construction:
In this case, the Islamic institution or bank, 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.
All these 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. If you are willing to start a career in highly growing Islamic banking sector, the Islamic finance certification and diploma in Islamic finance are great courses that AIMS offer.