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A conventional mortgage or loan is a legal agreement by which a bank, building society, etc. lends money at interest in exchange for taking title of the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt.
Unlike conventional mortgages and loans, Sharia based Home Financing do not involve interest charges and are based on joint ownership. The monthly payment one makes, increases his share in the property and includes a payment for the use of the share that the Bank owns. At the end of the finance term one will own the property outright.
Islamic Banking is consistent with Shariah and islamic rules; It is strictly against Interest or Riba. Islam prohibits in dealing money as a commodity; Time value for money is not taken into account.Bank depends on the fixed deposits and does not depend on central banks like in conventional banking. Takaful - Insurance Against losses due to misfortuneSukuk - Islamic bond or certificateVarious Modes of Islamic Finance1.Partnership based -Musharaka, Mudarabah2.Trade Based -Murabah3.Rental Based -IjarahBenefit of Islamic banking over conventional banking - Since the bank purchases and retains the ownership of asset, the misuse of funds are avoided. It doesn't go into wrong hands.Musharaka-Partnership basis. All parties will invest and share. Profit will be shared on profit sharing ratio but loss will be shared on the basis of amount invested.Mudarabah -This is the most popular one.Contract between 2 parties; one who is skilled (known as mudarib-will not invest) and one who invests (rabbil maal-mostly the bank); If profit, it will be shared but if loss, bank doesn't charge its fees and loss is transferred to the depositors.Murabaha-Bank purchases the goods on behalf of the customer and then he pays back slowly slowly and includes a profit for bank.Ijarah-bank purchases the car and rents out to the customer and customer gets ownership after a certain period.
