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.
