Muslim financial transactions are covered in the Qur’an and in Sharia law. Sharia law prevents Muslims from giving or receiving interest when they lend or borrow money. Usury or riba as it is known in Islam is regarded as unethical practice. If you take or give extra money on a loan then that money must be for goods or extra services. Sharia finance law makes it very difficult for Muslims to take part in the banking system of other countries. In countries where Sharia law prevails banking is a partnership between the lender and the borrower. If a Muslim needs to buy a major item such as a car or a property then the bank buys it for them, adds a mark-up and then gives the car or property to the individual on a lease basis. The terms and period of the lease are pre-agreed between the person and the bank and when the money is fully paid up then the payee becomes sole owner of the car or property. No actual interest changes hands because in Islam money has no intrinsic value.
In most non-Islamic countries it is difficult for a Muslim to buy a house or a car unless they can go to their family for money and pay the full amount up front. Another problematic area is the student loans system that prevails in the UK and in the United States. It is possible for American students to get around the law but most of them are not happy with it. When it comes to ordinary banking and major purchases such as a car or a property, UK banks have instituted a system that is compliant with Sharia law. The bank will own the car or the property and will add a mark-up on the price which is repaid over a pre-agreed period of time. When that time is up then the car or the property pass from the bank and the person is sole owner.
Business loans are handed in much the same way as people buy a house under Islamic law. All businesses, not just Muslim ones, are eligible for this system providing their business is ethical, i.e. not concerned with either alcohol or gambling. The bank and the business are in partnership, which means that they both share in the profits and the losses, unlike the western system where the business has to take all of the losses.
Student loans are still a problematic issue, although councils state that the extra money students repay on the loan is not interest but is meant to cover the cost of inflation, most Sharia experts do not agree. What is more difficult about student loans is that education is intangible. One Islamic bank in the UK has found a way around the student loan problem by buying a commodity such as copper for the amount the student needs for their tuition and then adding a mark-up. The student then sells the copper to obtain the money and pays back the same amount plus the mark-up when they graduate.