What is an Islamic finance loan?
Islamic finance (halal or halaal finance) is a way of banking, lending and borrowing money — that is consistent with the principles of Islamic or sharia law.
These principles include the avoidance of financial activities seen as forbidden (haram) — Including things like riba and usury. Ultimately, this means that sharia compliant loan providers — do not charge interest on any amount borrowed and do not fund businesses involved in things like alcohol, betting etc.
Islamic finance — considerations
Central to Islamic finance is the concept that, as money has no intrinsic value, one should not be able to make money from money directly. Money is simply seen as a medium of exchange and as such — charging interest is forbidden.
With Islamic finance, wealth can only be created by partaking in legitimate trade activities and investing in assets. In other words — money must be used in productive ways. Accordingly, Islamic finance is primarily based on trading — where risks are shared between the person providing the capital and the person with the expertise. Thus both profits and losses are shared.
How does Islamic finance work?
A business that is interested in a Islamic finance product, may approach an Islamic bank or other sharia compliant financial institution. These Islamic banks, can finance your business with a variety of different financial products — depending on what you specifically need.
These products can be used for working capital, project financing, equipment lease, equity-based finance, letters of islamic credit and more. These products will all be structured in ways that adhere to the principles of Islamic banking, namely: the sharing of profits and losses, and the ban on the collection and payment of interest.
Benefits of Islamic finance
Interest free (no interest to pay)
Promotes financial justice — risks and rewards are shared
Financial inclusion — encourages un-banked Muslims to benefit from finance
Reduces impact of harmful practices — alcohol, betting etc.
Promotes financial stability — less risk and more stable returns
Accelerates economic development — an alternative form of financing
Limitations of Islamic finance
High costs — as documentation is often tailor made to the transaction
Longer application processes — Islamic banks do more due diligence
Not many Islamic finance providers
