All about Islamic Loan

The American banking system collapse of 2008 has proved that the traditional banking system which earns profit by charging interest to the borrowers has got many loopholes. The American government had to rescue some of the banks by pumping taxpayer’s money into them, as these banks lost lot of money due to mortgage crisis. This crisis resulted in massive job cuts around the world. Since then, many multinational banks started looking at the Islamic banking system which easily survived the 2008’s banking and mortgage crisis.

Quran’s instructions to the Muslims

Islam is a religion which is followed by billions of people on this planet. Islam suggests many ways / laws to make our day to day life better. These laws are known as Islamic laws and Sharia law.

The Holy Quran asks Muslims around the world to not to engage in any kind of trade which involves lending money and asking borrower to pay it back with interest. It also asks Muslims to stay away from gambling, selling or buying alcoholic drinks, tobacco or any other unlawful activity.

Islamic financial model

This is a financial model which is based on Sharia law. It is completely different than traditional banking system in which a bank offers loan to the borrower and charges heavy interest on it. Islamic banking does not allow Muslims to take a loan and pay interest for it. It even says that Muslims should not remain as witness in any kind of agreement or contract which talks about charging interest. This model is so attractive, that it is also attracting non Muslims.

Islamic Loan

It is a type of interest free loan which is offered under Islamic banking system. Lender does not charge interest on these loans. Instead of charging interest, they charge a small commission amount which is affordable to both- the lender and borrower.

Ijarah and Murabahah are the two popular types of Islamic loan. In case of I Ijarah, the lender and buyer sign an agreement about the amount of installment and other terms for mortgage. Then the lender buys the property and hands over its possession to the borrower. The borrower starts paying the installment as per agreed in the agreement and also pays a small amount as rent. Lender changes the title of the place as soon as the borrower pays all his installments.

In case of Murabahah, the lender and borrower sit together and decide the amount of installment.  Bank buys the concerned property and transfers it to the borrower’s name immediately. After this, the borrower keeps on making payment till the mortgage amount is completely settled. The borrower needs to make a large amount of down payment, as bank faces lot of risk in case of nonpayment by the borrower.


Thanks to Islamic banking, many Muslims from around the world are able to take advantage form Islamic home mortgage to buy their own house.

There are several multinational banks and financial institutions in the United States, the United Kingdom, Asia, and the Middle East which offer Islamic banking services. Unfortunately, in November 2012, the Reserve Bank of India (RBI) ruled out (denied) the introduction of Islamic banking in India due to legal issues.

By- Nitten Gokhaley

This story was also published in Pune’s weekly newspaper- Campus Express (in– 8-11-2013’s issue)


Nitten writes for several websites and a newspapers like- Life 365, and Campus Express.  He writes on variety of topics like Health, Travel, Business, Hollywood, Gadgets, Life style, Automobile, Politics, Science, Sociology, Psychology and more.

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All rights reserved with- Nitten Gokhaley – Copyright 2013

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