Islamic Finance Basics

So what is the main difference between conventional banking and Islamic banking?

With conventional banking, a customer can walk into a branch, request a loan, and then pay the loan back over a period of time with interest whereas with Islamic banking this is not acceptable as interest (Riba) is prohibited. Instead, the Islamic bank would purchase the product or service that the customer requires the loan for, and sell this onto the customer at a higher price over an agreed period of time, thus making a profit. Below are two simple diagrams that illustrate the Conventional and Islamic banking systems.

Below are two diagrams that illustrate the Conventional and Islamic banking systems:

Diagram: CONVENTIONAL BANK provides money (loan) to CUSTOMER. CUSTOMER then pays money (loan repayment) plus Interest to CONVENTIONAL BANK.

Diagram: ISLAMIC BANK purchases product / service and sells at higher price to CUSTOMER. CUSTOMER then pays money to ISLAMIC BANK to purchase product / service.

It is important to point our here that Conventional funds can be invested in an Islamic manner, i.e. with profit and not interest. Similarly a non-Muslim can obtain an Islamic loan or mortgage for ethical reasons. Islamic funds or loans cannot be used to support or invest in forbidden activities such casinos, gambling and illicit leisure industry; weapons related products; alcohol and tobacco products inter alia and this demonstrates the ethical nature of Islamic finance.