Image via Wikipedia
Financial products are very different in the Muslim world in comparison to the west. Some basic principles to keep in mind are briefly covered below.
Separation of Church and State: Unlike western finance, the governments of most Islamic states are very involved in the “spiritual” aspects of life. Often the state or government collects “alms” allowed for in the Quran and distributes these to care for the poor. Businesses are involved when financing comes into play. The main prohibitions that effect the acceptance of western financial products in the Muslim world are the concepts of collateral and interest. The charging of “interest” on a loan is forbidden by the Quran. Therefore, commercial lending often takes on many aspects of a business partnership. The banker does not just process the paperwork and hand a check to his Muslim customer.
Murabaha
The banker often meets with the business person, helps to assess the actual needs and then goes shopping to obtain those products. The banker pays for the goods. An agreement is drawn up on how the banker will be repaid. Thus is a very real way, the banker shares the risk of the loan and stays involved with his customer and their business. Many of the principles practiced make good business sense.
Ijara
The other common credit product used in Muslim countries is very much like a “lease” agreement between the banker and client. The banker purchases the needed equipment and supplies and then leases them to the small business owner. The terms of the lease therefore avoid the prohibited use of interest.
