Under Shariah financing principals, a bank or lender is not allowed to charge interest nor can they charge “administration fees” that are nothing more than thinly disguised interest. Lenders must structure their financing to meet Shariah principals which mean that they must take a higher level of risk than banks normally assume. Broadly speaking, if you are looking for Shariah-compliant financing to purchase goods or services, the lender can provide funds in one of three ways:
i) Buying the goods and reselling them over time at a profit;
ii) Buying the goods and leasing them over time at a profit; or
iii) Entering into a partnership with the client and sharing in the profit earned from the goods bought.
When depositing money in a financial institution, Shariah depositors are not allowed to earn interest but can earn a share of the bank’s profits.
When it comes to investing, Shariah principals also apply. For those who follow Islamic financing principals, there are various industries in which one cannot invest (haram). These include: gambling, liquor, pornography and companies that earn their money from interest.
Ultimately, however, Shariah compliant products are reviewed by Islamic scholars who determine if the product meets Islamic religious requirements (halal).
Articles and papers on Islamic financing written by Lorne Cutler can be found at: