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As per my previous question on "The difference between Islamic Banks and Western Banks", it was answered that Islamic Banks do not charge interest but instead agree on a percentage of profits the borrower makes with the borrowed funds. Also if the borrower makes a loss with the borrowed funds, then the bank will absorb the full loss.

My question is how do Islamic banks deal with personal loans (for a car, a boat or a holiday)? Do they lend for these purposes, or as there will be no profits made by the borrower will they avoid this type of lending?

The only way I can see personal lending being viable for Islamic Banks is for them to agree with the borrower on a percentage of the amount borrowed to be paid to the bank over and above the original amount borrowed. Is this how it would work?

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    @Chad, the two posts are not identical, the first one is about the difference with Islamic Banks being they don't charge interest but instead agree on a percentage of profits with the borrower, whilst this post is enquiring how Islamic Banks would deal with personal loans where there is no profits.
    – Victor
    Jan 17, 2012 at 19:30

2 Answers 2

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The basic idea that a lot of Islamic banks use is to buy the personal property for the customer and then sell them back the property (car,boat, house etc.) at a profit and allow the customer to pay for it in installments. It generally comes out to be pretty equal to if the bank had just charged them interest on a loan, but through some legalese it can be Sharia compliant.

Other ways include buy with a lease back provision.

There is a lot of information about both of your questions at http://en.wikipedia.org/wiki/Islamic_banking

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    That is interesting, and I suppose can be done for something like a car or boat or furniture. But what about for unsecued loans for things such as holidays or for credit card type products? I'd better look up wikipedia before they shut down for 24 hours. Thank-you Pablitorun.
    – Victor
    Jan 18, 2012 at 2:13
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    @victor I hadn't pondered the holiday type purchase. My guess is that it would follow a similar concept of having the bank prepurchase the vacation (holiday) and then selling it back. It is entirely possible that they don't do plain unsecured cash loans, though, I would need to research it further as well.
    – Pablitorun
    Jan 18, 2012 at 15:58
  • +1 for the wiki link. It seems to be a great resource. I do not see anything on how what we would call default is handled on these laws there though.
    – user4127
    Jan 19, 2012 at 15:13
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Islamic Banks do provide consumer financing in the multiple ways, following are some simple models for your consumption:

  1. Auto Finance - Bank purchases a car from the market and leases it to customer on a variable rental rate for a certain time period. In the end Bank sells this car to customer at a nominal price or bank can gift the car to customer as per its own discretion.

  2. Home Finance - Same as auto finance. Or a common structure 'Diminishing Musharaka' is used by majority banks for house finance. You can Google it for more info, as it may take a lot time to write here.

  3. Personal Finance - it is usually an unsecured financing in which customer doesn't have any asset. For example a customer needs $1000. He approached bank get the credit approval. Bank buys commodity from a supplier amounting to $1000 and sells it to its customer for $1200 on deferred payment basis. Customer after obtaining ownership and possession of commodity sells it to a commodity broker and gets the instant cash.

There can be many ways of doing Sharia Compliant transactions.

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    How is #3 different from interest?
    – jcm
    Oct 15, 2019 at 10:07
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    @jcm - #3 is not exactly the same, though from a high level view it differs from interest in semantics only, and that's actually the point. Like many religions there are certain rules that should be followed, and sometimes workarounds are necessary to help bridge the gap between literal rules and practical life in modern times. (Sabbath mode on ovens is a great example of this.)
    – TTT
    Oct 15, 2019 at 13:50

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