What are Shariah Compliant Loans?
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 the shariah compliant loans. As the name indicates, a shariah compliant loan is literally a loan taken and given on the basis of rules and guidelines set out by Shariah. Shariah loans 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 ‘Haraam’.
Duties of the Creditors, According to Shariah:
- Islamic loan or loan 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 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 Loans and Islamic Loans:
The Public Treasury in an Islamic state is called Bait-ul-Maal and it provides Shariah compliant loans or Muslim loans to needy people of the society. For examples: Shariah compliant loans or Islamic loans (generally termed as 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 loans, 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 Shariah Loans Offered by Islamic Bank
There are several forms of Shariah compliant loans offered by Islamic banks and institutions. 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. Following are just a few examples of shariah loans offered by Islamic banks and other financial institutions:
Some Islamic banks offer a lease-to-purchase (“Ijara wa Iqtinaa”) 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 Murabaha, 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 Shariah compliant loan 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.
Shariah 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, is 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 course, diploma in Islamic finance, master in Islamic finance and phd in Islamic finance are great courses that AIMS offer.