When you buy a car using equity-based ‘Murabaha Financing’ the bank buys that car for you, adds its profit*, and sells you the car in installments. *The profit earned here is not interest because it was not earned by lending money rather it was earned by selling you an asset. Ijarah is also a trade-based activity, the bank buys the asset and leases it to the client, and at the end of the lease period, the ownership is transferred. Correct me if I’m wrong, but in diminished “musharakah” the bank and client jointly own the asset and the client then buys the share of the Bank. These are the main three types of Islamic banking.
What is Islamic banking in Pakistan
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.
