Islamic Banking and No Interest Loans - The New Hot Topics

Almost daily you will see some newspaper, blog or website talking about Islamic banking being the new "Hot Topic" of the year. Islamic finance has arrived.

Islamic banking and Islam Sharia no interest loans have become hot topics in the last year as many banks have rushed to create their own approved Sharia loan programs. According to many speculators 2011 will see more and more Islamic banks opening up to handle the new rush of applicants for these interest-free loans.

According to the Daily Monitor (January 11, 2011) "In 2011, Shall We See the Emergence of Islamic  Banking," "Recent reports have indicated that the central bank will soon move to regulate an Islamic commercial bank." This news has shown to be an immediate indicator of what is in store for 2011.

The Monitor goes on to explain how the banks are servicing Muslims, not the religion itself. With an upsurge in banks offering interest-free loans, more and more people are rushing to this basic rent-to-own program. In fact in the end the Islamic mortgage program in most cases will cost the borrower more money due to a slightly higher profit rate than a regular conventional mortgage.

This article will include many types of Islamic loans not just mortgage loans.

What is an Islamic Loan?

An Islamic loan can be obtained by anyone. It is an interest free loan that is given to anyone who qualifies. Islamic loan qualifications are tougher than regular conventional loans due to the fact that the loan must be assured of success. The borrower is looked at very strict to see that this one purchase is secure.

Islamic loan applications cannot be falsified as compared to some conventional loan deals where the income is elevated. Islamic finance is built on religious backing and requires certain ethical guidelines as set up by the Sharia commitee. No substandard loans (B loans) are allowed, no interest and the owner must occupy the home.

The two types of Islamic mortgage loans are called:
  • Murahaba
  • Ijara.
These programs are not called loans on the paperwork due to the Sharia rulings. The program that is closest to Islamic belief is the Ijara program as it is merely a rent-to-own program. It is called a declining rent program due to the fact the rent decreases as the amount owing on the mortgage decreases. Murahaba is where the bank buys the home and inflates the price with a profit rate that has been established by the bank or finance company and then allows the borrower to make monthly payments until the loan is paid in full. The programs differ from bank to bank and so do the fees. Some banks charge a higher application fee and a lower profit rate and vice versa.

Borrowers should be careful of banks offering lower application fees as the profit rate over 30 years may be substantially higher.

Ethical Loans – Are They Worth Their Weight in Gold?

The requirements for any Islamic financing are:
  • No interest.
  • No investment in gaming or alcohol.
  • No substandard mortgages.
  • All investors take part in profit and loss.
 With these ethical standards in place, banks are also obligated to pay a portion of the money in
zakat (charity) to the poor.