ISLAMIC LOANS

Approaches to Financial Loans Using Islamic Principles



Islamic Principles and Financial Loans

Introduction

Islamic law principles have been derived from two main sources that are Qur'an and the Sunnah. Islamic finance central pillar comprises of wealth that should be produced from legitimate trade & asset based investment, whereas the utilization of money for further money making is specifically forbidden. Moreover, this states that there is no concept of Riba in Islamic Finance i.e. interest charging and paying is completely forbidden according to the Islamic principle.

According to the Islamic Principle, investment also comprises of social as well as ethical advantage to the wider society that is masir which is known as short term speculative. This is also strictly forbidden in Islamic Finance. Investments in sectors that are termed as inappropriate on moral perspective have also been prohibited by Shariah Law. These are industries which includes, gambling, alcohol or drugs or any other manufacturing of the drugs through which human loose their mentally. Every Islamic Bank has to adhere those principle stated by shariah law which is governed by the shariah Board.

This board is responsible for overseeing the banking processes running on principle of Islam. There are certain views of shariah law that might require individual interpretation. The shariah board is also responsible to determine regarding the proposed deals, whether they are acceptable to the Islamic banks on the shariah law ground or not (Schoon, 2011, pp. 25).

As Islamic Finance prohibits the charging of interest, banks have to produce their profits through the provision of fee-based services or through any type of partnership with clients where the risk and the profit or losses shared between the customers as well as with banks, according to the agreed conditions. These arrangements offers the clients to illustrate salary from the business, this is the deduction from the profits. Islamic law also gives permission for a series of leasing style agreements in which banks could purchase assets on the customer behalf, charging a regular correspond rental-fee (Profit on Mudaraba Deposit in Islamic Banking, 2011, pp. N/A).

As far as western banking is concern, these agreements could be on fixed term for operating lease or lease purchase along with the latter compelling the client for purchasing the assets when duration of the period ends at pre-determined price. There are few leasing which are very straightforward, as other are or could turn to be out very complex relying on the original purchasing of the assets by the bank.

Since, Islamic Finance do not allow the interest charging, Islamic Bank is the original buyer of the assets on the variable rate that might attempt for an arrangement through which the rental fees increases in order to compensate any increase in cost of financing. Therefore, more or less Shariah Board might resist for approving such agreements that results with interest rate risk exposure to bank. The main theme of this paper is to evaluate financial loans using Islamic principles (Rules For Mudaraba Based Deposits Issued, 2012, ...