Unlike the ordinary commercial banking, when it comes to loans, there is something exceptional about Islamic banking and loans in particular. Based on Islamic law, popularly known as Sharia, the backbones of Islam, there are some laws governing loans, which are drawn from the Quran. The application of Islamic banking has widely been a beneficiary of strong Islamic nations, though it is quickly spreading even to the capitalist western economies and is equally being accepted even by non-Muslims. Currently, in economies not dominated by Muslims, the Islamic loans are being given even to the non Muslims so these banks are gradually becoming economically viable even in regions dominated by other faiths; for instance, Christianity.
According to Sharia, the Islamic law, there should be no interests charged by banks or even individuals on Islamic loans whatsoever. Muslim faithful should not accept or receive interest or fees on what is loaned from a bank or an individual. What you borrow is what you return as Sharia does prohibit charging of interest, popularly known as riba, and regards it as haraam meaning forbidden by the Quran. This simply means that a person of the Muslim faith or institution cannot accept or charge interest on borrowed loans. The obvious question that lingers in your mind is how these banks and financial institution survive.
For many years, Muslim economies, economists, financial institutions as well as banks have come up with a way to counterbalance this to make Islamic banking financially viable, when there are no interests on Islamic loans. Banks, financial institutions and individuals form partnership with the borrower, a concept known as Musharaka. Banks, individuals or other financial institutions from which you have taken loans may buy an asset, which it may later sell to you making some profit such as the interest it would have charged on you. In many instances, however, the bank partners with you to own assets or businesses jointly, which you gradually buy with a series of payments that are a little higher, and the bank make profits. By this method, the Islamic banking realizes its objectives like any other commercial bank the difference being the commercial bank charges direct interest.
An in depth illustration of Islamic Banking shows that each time you borrow a loan, you form a partnership with that bank. You tell the bank the asset you want to buy and it does it for you. In return, you pay back the fee for using the asset as well as the fee for its ownership over the period of time you have agreed that is the bank’s capital. When the period expires, the asset becomes yours. A critical analysis of this concept shows that it is a type of leasing that culminates in you owning the asset.
To conclude, Islamic loans help bring unity without the feeling of exploitation as the lender is also viewed as a participant in the partnership. On the contrary, the ordinary banks are more direct as they grant you a loan and without looking at how you spend it, as long as you pay back with some interest.