[hmorrar]

The concept of Islamic Financig is dervied from the general rules of Islam for trading and economy, this is where the name came from for Islamic Banking.

So the key and main difference is at the way services or commodoties get traded, below are some of the rules:

1- Loaning and borrowing money are mean of help, it is forbidden to get any interest as return on a loan or a borrow, only zero interest is allowed.

2- Debts cannot be traded, buying or selling debts is not allowed and debts do not get carried over to enharentance after death

3- The commodity must be real, owned and help by the owner before buying or selling, it is not allowed to buy or sell anything you do not own

4- The good must be fully descriable, that is quantified and described, for example conventional insurance contracts are not allowed in Islam because you are paying a preimium and getting unknown return, in time, in quantity, in nature

5- A selling price can be set upfront by any mean, but cannot change after the deal takes place specially when delays happen, again cannot charge interest

6- If payment is deferred, it is a risk taken by the seller so he can charge higher price than cash payments, but once the deal is done, price cannot be increased or decreased depending on pament time

7- any mean of trading is allowed from selling, renting or sharing


Simple example for buying a house with Islamic Finance:
A house is 100K cash, and I want to finance it for 5 years payments
The bank offers to finance it for 5 years with 4% profit rate yearly
The cost is calculated for 4% * 5 = 20% * 100K = 20K profit
Selling price = 120K, on 60 months (5 * 12) so monthly payments = 2000K

So after we agree, the bank will purchase the house and own it, so the house owner will get his money and house ownership transferred to the bank

The bank will resell the house to me, so I own the house now, and I owe the bank 120K and the bank will mortgage the house to itself for collaterals against risk

So I start paying 2K every month, and for example after 30 months I stopped paying because I don't have money anymore

So after 30 months I paied 60K and I missed 3 or 4 payments, the remaining is still 60K
So the fifth month the bank decided to take the house because I couldn't pay, this has to be proven through court
The bank will auction the house, the market price was 150K and it was sold for that price

So the bank takes his money, but wait...
The bank paid on my behalf 100K + 20K profit, I paid 60K so remaning 60K
So the bank takes his 60K from the 150K, and returns back 90K to me

So I paied 60K, and by selling the house I got 90K, so I earned 30K because the house price went up!

So what would you think would have happened if I financed the house using conventional banking?

[talaniman]

The bank decided to take the house because I couldn't pay,

When you default on a loan, you give up the right to profit from its sale.

Sorry but you have lost your investment, and the bank takes the profits from the sale to mitigate any losses incurred in your default.

[hmorrar]

When you default on a loan, you give up the right to profit from its sale.

Sorry but you have lost your investment, and the bank takes the profits from the sale to mitigate any losses incurred in your default.

Not according to Islamic laws!! This is totally different in Islamic Finance, defaulting to pay is just like owing someone money and cannot pay it, so if court decides to take your house or car to pay it, you get the remaining!