Difference Between Islamic Finance (Murabaha) and A Loan

There are some banks that offer a type of financing called Islamic financing, but what is it, and how is it different from regular financing? In this article, we will tell you more about Islamic finance.

Find out the difference between these two types of loans: the difference between personal loans and car loans

What is Islamic Finance?

Islamic finance is a type of loan that some banks- usually Gulf banks- provide. It is a way to offer financing products that are not based on the idea of profiting from the increased interest on the principal of the loan.

There are many types of Islamic finance such as Murabaha, Tawarruq, and Musharakah among others, but the most common type is Murabaha, and this is what we will talk about in this article.

“An Islamic loan is a structure where the bank buys the asset then sells it to the client with a certain percentage added to the price which is the bank’s profit. 

This would be the same as if you bought a house, and waited a few years then sold it for a profit at a slightly higher price.

Don’t miss our article on how to obtain a loan with the 18% certificate as collateral.   

How is an Islamic loan different from a regular loan?

• Regular loan: the bank lends the customer money to buy a specific item with the customer being the owner. In return the client pays the bank an extra amount in interest fees which is the bank’s profit.

• Islamic loan: the bank buys the asset then sells it to the client with a certain percentage added to the price which is the bank’s profit. This would be the same as if you bought a house with your money, and waited a few years before selling it for a profit at a slightly higher price.
• This allows the bank to comply with Islamic rules of trade because it did not profit from lending money, but instead just bought an item and sold it later.

• Payment method: The client makes payments to the bank in installments while the asset remains in the bank's ownership until the client pays in full. This is based on Murabaha in Islamic law. 

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Are Islamic loans really different from regular loans? 

Yes, in theory they are different but some see them as just a method to circumvent Islamic Sharia laws. However, in the eyes of Islamic institutions such as Al-Azhar and others there is no problem in dealing with banks in general, even non-Islamic ones.