Islamic Loan

What is Islamic Loan ?

In a loan, as an example, there are costs of administering the Islamic loan, such as adminstration and accounting. Those costs are allow. As well, one may charge for inflation and still be sharia-compliant. Then, there is the risk factor, where allowance may be made for bad debts. What is haram, not allowed, is the profit element in interest. Since the actual rate of inflation and of bad debts can only be known after the fact, if the total cost due to these two items is less than forecast, a rebate is due the borrower.

There are difficulties with this scheme, however. Suppose the forecast underestimates inflation plus bad debts. As well, since these two elements can only be detected after the fact, we are faced with a permanent regression. At the time a final determination is made, the inflation rate and default rate will be for a previous time period, not the most recent.

The restriction against gambling includes a restriction against excessive risk, such as hedging. However, hedging as a means of lessening a risk appears to be allowed.

In order to be interest free, the "lender" could mark up a product for a predetermined profit and sell it to a "borrower" on time, or it could lease it to him. A Islamic Bank might buy up a Halal Muslim Product before manufacture at a discount. It points to the essential function of Islamic Banking: the Islamic Bank participates in the capital enterprise and shares in the risk.