How dose Islamic Banking work

NAA Law Firm

Islamic banking in some of its basic principles is different from the current banking industry in the world. The main difference is in getting a profit for money, which is referred to as usury. According to Islamic teachings, usury is prohibited.

A person or bank cannot borrow people’s money and give them a percentage as interest. Also, a bank can not lend money to people and gain interest on a loan.

Borrowing in Islamic law is a contract with no interest for money. The borrower is obligated to pay only the principal amount of the loan at maturity. So, few will be willing to lend their money to the bank. The bank will also not want to lend its money to anyone. So, Banking seems to be impossible.

But there is a solution. Islamic banking is not based on a loan agreement, but other Islamic contracts are used. In these agreements, the profits are not paid into money, but the action.

The most important of these contracts are:

–    Partnership

–    Contract of Ja’alah

–    Installment plan contract

–    Presale contract

–    Buy a loan contract

–    Construction contract

–    Empower or agent contracts

–    Leasing contract

–    …

The bank collects people’s money by concluding empower or agent agreements. That is, the bank is a customer representative to invest in customer money. The bank pays the money collected from depositors to business owners by concluding a partnership, Ja’alah or other agreements.

In this way, the bank will partner with business owners, and profit will be shared between the bank and the creditor.  If the partnership suffers losses, the bank will also suffer. But in practice, the bank will never suffer. Because the bank inserts in the contract if the partnership sustains a loss, the creditor is committed to paying the bank the principal amount of credit and the expected profit. Expected Profit in these contracts may be up to 30% of the amount of credit. Expected Profit is subject to the regulations of the Money and Credit Council.

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About Hormoz Yazdani Zunuz

first grade attorney at law
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