Basically, factor in the importance of Islamic banking encourages a Profit and Loss sharing model in which both parties (Customer and Bank) take benefit and bear the loss together. Conventional gives you money to buy a car and charge interest on money whereas Islamic bank gives you a car and charges rent on the car. For example: If you have a car value of 20K and you want to sell it for 25k to someone saying you can pay anytime but you have to pay 25k and you signed a contract then 5k is your profit it is not Mortgage. But if you say you have to pay 25k on extra you have to pay me some percent or some amount on top of it, that’s not allowed. In the contract which you are signing with the bank if it defines any term like Mortgage or late fee on missing payment then it’s not allowed in Islam. If they are saying you have to pay a fixed amount without any time restrictions and an extra amount what you have defined on a contract then it’s allowed.
Profit and loss are equally shared in Islamic banking
Islamic finance transactions are based on the concept of sharing risk and reward between the investor and the user of funds. For example, in conventional banking, the premium paid by the Customer is lost in case of an accident, and the car is completely destroyed whereas, in Islamic banking, both banks and Customers share the loss and a certain amount is refunded back to the Customer after settlement. This is just one difference, there are many other differences.
What makes it halaal or haram is the “Contract”, wordings are important,
Concepts and instruments are Islamic. The issue is about their application. Usually, Islamic banks are applying them for their own profit.
Being a finance professional had come across a scenario in a listed company where the bank was sharing a profit under the Musharika agreement but when the company registered a loss bank asked to change the formula.
It’s not about names and terms they are using. It’s all about the concepts and practices they implement.
Islamic Banking is Haram
Firstly the term. Calling anything Islamic means it comes from Islam. And Islam was completed by the prophet Muhammad ﷺ.
Now there will be people who say that’s because it is within the bounds of Islam that’s why it’s called Islamic. Which doesn’t make sense, because if we take anything that was never approved by Islam and add Islamic elements to it, it shall not work. Like doing a robbery after performing ablution would still be haram.
Some of the company’s and individuals’ money pertains to interest-based businesses like NBFC, DFI, and AMC funds not always but 90% of deposits of these companies are interest base. Then Islamic Bank reinvests these deposits into different projects. The quest is whether the profit generated by Islamic Bank which they further distribute to their lenders shariah-compliant or not? Definitely, it turns out to be Haram if the gains are from companies that themselves rely on capitalism and/or do prohibited stuff trade. Also, banks are selling and buying currency notes which is totally haram. In Islamic banks, also sell and buy currency notes.
A lame remark often encountered by those opting for Islamic banking:
As mufti has endorsed it so even if it ain’t 100% Islamic you won’t share the blame (gunnah).
Islamic Banking is the same as Conventional Banking
Whereas to some people, Islamic or conventional banking makes not a dime of a difference – but people say the sin will be on MUFTI Sahab and not you so Islamic banking in Pakistan basically becomes sugar-coated banking. The difference is they call markup and stuff “RENT” by which you feel and consider it’s not Riba. Javed Ahmed Ghamdi also shares the same thoughts about renting for the capital cost borne by the bank in our Car Ijarah example. Some people opt for Islamic Banking products because the extra amount they pay on late repayment is Donated to Charity (Sadqa) whereas in the conventional bank it becomes the income of the bank. But the trouble is when you get advert statements like
