How do Islamic banks make money if interest is prohibited?

Question

I know that Islamic Banking involves the prohibition of interest based loans. But how do Islamic Banks make profit if they charge no interest?

Answer 1

A traditional bank makes money by lending people money and charging interest on that. And they provide various services and charges money for that also. Again they take money from other people and pay them interest, with lesser rate.

An Islamic bank also lends money to people. But it is kind of a business agreement between the bank and the borrower. The borrower will run the business while bank will look over. The profit of that business will be shared between the bank and the borrower in a prefixed rate documented earlier in the agreement. Islamic bank also provide services and charge money.

When people keep money in an Islamic bank, they become kind of share-holder of the bank's overall business. And share profits in a prefixed rate. Sometimes, a person can invest in a specific project and profits will be calculated specifically for that project.

Answer 2

قوله تعالى (وَأَحَلَّ اللَّهُ البَيْعَ وَحَرَّمَ الرِّبَا) 275 البقرة

whereas Allah has permitted trading and forbidden Riba (usury)

There is a difference between trading and riba.

From Wikipedia

Islamic banking has the same purpose as conventional banking: to make money for the banking institute by lending out capital. Because Islam forbids simply lending out money at interest , Islamic rules on transactions (known as Fiqh al-Muamalat) have been created to avoid this problem. The basic technique to avoid the prohibition is the sharing of profit and loss, via terms such as profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijar).

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank's profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabahah.

Answer 3

Working of Islamic banking and conventional banking are quite different with one another. In Islamic Banking the concept of profit sharing, ownership and risk bearing matters are the vital elements of Islamic banking that differentiate it from the conventional banking.

Answer 4

the idea behind progibiting usary primarily was to discourage the holding power of money. to be really honest i find islamic banking as more or less the same thing its just playing with the concepts to do exactly the same thing " considering that compond interest is not prevalent any more .....conventional banking and islamic banking are doing the same thing- Al azhar university therefore has made conventional banking as halal - i we really think if we need to have a purely islamic economic system we have to follow the model Col gaddafi formulated for african union - only then an islamic bank can exist ....in a haram economic system a halal institution can not be established!

Answer 5

thank you for asking this question, it is the same question I have in my mind for quite sometime now.

Some aspect of the islamic banking, has been bothering me a little bit. Yes, it is some sort of profit sharing instead of earning an interest. However, how about if a business not making any profit, does it mean that the bank will allow him not to pay the loan until the business starts to make money? The owner of the business won't get penalised?

Also, if a family bought a house from an islamic bank and the main income earner lost his/her job and the family is not able to pay the loan for months, will they be allowed to live in the house without getting penalised?

As far as I understand from what I read and heard, that is in a hardship, the lender has to be flexible and understanding of the situation to relieve the burden of the debt until the people who borrowed from them are able to pay again. But, from what I read on the internet some people who have a loan from islamic banks are being punished from missing some of the monthly payment. So, does this practice of penalised people in a hardship comply with what is really stated in Al-Quran? Is't not the main reason of lending people money in the eye of islam is to assist them to get out from their hardship? Instead in some cases the islamic banking are chasing people to clear their debts. From this angle, what is the difference between the islamic banking and the conventional banking?

Sorry, I have a lot of other things in my mind regarding islamic banking. Believe me, the last thing I have in mind is to commit the 2nd main sins out of the 7 major sins, and to loose all of my good deeds, but May Allah assist and make it easy for me to truly understand the whole thing. Insh'Allah