Islamic commercial banks are based on the Islamic faith and follow principles of Shariah. Shariah is the Muslim canonical law derived from the teachings of the Quran.
The law of not charging interest on any money being lent is an important Shariah law and the foundation of Islamic commercial banks and financial models. This law advocates earning of money through only legitimate trade and investment and is a part of the larger Islamic legal system that shuns earning interest completely.
Here are the differences between a conventional mortgage and an Islamic mortgage at a glance:
Islamic loans are intended for the growth and prosperity of the borrower more than for profit. So, instead of charging any interest, the Islamic bank becomes a partner in the business or property deal for which the money is borrowed and takes a part of the profits earned. This percentage of profit is mentioned on an official document before the loan is given. The Islamic bank also participates in the financial venture for which the loan is sought.
In cases where the mortgage is for purchase of a house, the Islamic bank shares ownership of the house with the borrower for a particular tenure, in which the borrower repays the bank along with a small amount of the profit incurred in terms of the increase in value of the land and property over a specified period. The ownership stake of the bank reduces over time and the borrower becomes the sole proprietor eventually.
The terms of repayment for Islamic mortgage are lenient to encourage more and more people to venture into new enterprises without any financial worries.
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