How does Islamic banking system make profit

[nconroy]

If the Islamic banking model does not allow the charging of interest on loans, how do Islamic banks make the necessary profits to survive?

When they borrow from western banks, are they allowed to pay interest on their own borrowings?

 

[huskerdu]

A good explanation here of Islamic banking.

http://en.wikipedia.org/wiki/Islamic_banking

One of the ways in which Sharia compliant mortgages are given is that the bank buys the house, you pay rent to the bank and also save to buy it off the bank at an agreed later date, which is roughly equivalent to interest and capital repayments.

 

[mathepac]

There is nothing in the Islamic shariah rules that I am aware of forbidding the charging or paying of interest; what is forbidden is usury or excessive interest, the same invocation that supposedly applies in Christianity. Islamic banks operate along commercial lines but account-holders share profits and losses in partnership with the bank and mortgage business is run with agreements totally different to the principles used by non-Islamic mortgage-lenders.

 

[Capt. Beaky]

Has the Islamic banking world become unstuck like most others (Dubai excluded)?

 

[nconroy]

Their system of banks AND borrowers sharing profits and losses would have had a dampening effect on the excess by the banks over the last several years. If the banks were to suffer the losses as well as the gains, they would have had a more prudent approach to lending practices.

Also, if the bank actually owned the property and the borrower "rented" until the loan was repaid, banks would not have let the property bubble develop. A form of self regulation!!!!

Then again, look at Dubai, what the heck. Is there any system that could control man's ability to eventually wreck their environment. The smarter we get the more dangerous we get.

 

[ontour]

The concept of shared ownership gives a rose tinted view of Islamic banking. While there are excellent principles of shared ownership there are also many laws to ensure that there are extreme consequences to a customer defaulting. With a property transaction you may have to write cheques for all of your monthly rent for the next twenty years, the reasoning being that it is a criminal offence to write a bad cheque. This is one example from one country, there are huge variations.

Non-recourse mortgages would be a much simpler way to dampen reckless lending by financial institutions.

Another factor is that many countries where Islamic banking has significant penetration accept that all people do not have equal opportunities and they are not attempting to give everyone the same opportunity. Banks have customers that do not earn enough money to be allowed to use the branches, you can only use certain ATMs. In Ireland we try to treat everyone equally by providing low earners with credit cards and mortgages because it would be discriminatory not to allow them to access these products .........ignoring the fact that they can't afford them.