A brief feature on Shariah-compliant loans

Economics 28 Apr 2021 Contributor
Know-how
Shariah-compliant loans
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Generally, the system of Islamic banking follows Shariah principles and guidelines. That is why a true Muslim prefers this form of banking. And an important component of Islamic banking is the Shariah-compliant loans.

What is a Shariah-compliant loan?

A Shariah-compliant loan is actually a loan taken and given on the basis of Shariah laws. This loan is different from conventional loans essentially, as it roots out the element of interest or Riba. This is because, in our pious religion, Riba is Haraam or forbidden.

The Shariah rules concerning Islamic loans:

The loan may be in any form, both cash, and kind. Be it for a personal reason or for the purpose of business, the loan must be given without Riba.

The Holy Qur’an has made it obligatory on both creditor and debtor to set up a contract in writing in the presence of two witnesses. This will help to settle terms and conditions regarding repayment without dispute.

According to Hadeeth, if a person never returns a loan, he or she is a thief. A debtor is always eligible for Zakat, which will discharge the burden of his or her debt.

The Duties of a Debtor, according to Shariah Law:

The Shariah-compliant loans must be taken only when it is unavoidable. It must be taken when it is absolutely necessary. The loan must not be used for haram purposes or for luxury. A contract should be made in writing and two witnesses must be present at the time of signing.

A debtor should pay back the loan within the promised time period or earlier. The debtor must clear his or her debts before death, else his legal heirs should clear the debts or Shariah loans.

The duties of a creditor on Shariah-compliant loans:

Shariah loan should be given to a genuinely needy person. A creditor must also make a contract in writing in presence of two witnesses. If the debtor became insolvent and unable to pay back the loan, the creditor should remit the debt. It is an act of great virtue which carries many rewards from Allah.

The creditor must accept installments. The creditor is allowed to use harsh words in case of a solvent debtor, who does not repay the loan. But still, he is instructed not to lose his cool. He should kindly treat his debtor and should not injure the dignity of the debtor.

Forms of Shariah-compliant Loans offered by Islamic Bank:

There are various Shariah-compliant loans offered by Islamic banks and institutions. These banks offer financial opportunities for their clients without the system of interest. Following are some examples of Shariah loans offered by Islamic financial institutes-

1. Home Financing:

Some Islamic financial institutes offer a lease to purchase or Ijara wa Iqtinaa for home financing. They assist their clients in getting good deals in real estate. With Murabaha, Ijara and Musharaka, the clients became able to avail home financing.

2. Business Financing:

Through Ijara wa Iqtinaa, a bank and a client can invest in a business together. With time, at a rate calculated according to the lease, the customer would pay the bank back. Else, the bank can share the profits of the business.

3. Equipment Financing:

Shariah-compliant loans for the purchase of equipment and objects. The bank and client both research the cost of the object in the market and price mark it. Then the two parties may then purchase the property together.

4. Islamic Student Loans:

It is theoretically possible to create Shariah-compliant student loans. Though the market for them is tiny, even in Islamic countries.

5. Shariah loans for construction:

In this case, the Islamic institutions and the client may hold the authority to an in-progress house together while maintaining a profit and loss sharing. This form is deep-rooted in the principles of Islamic financing.

All these options may serve various purposes, but these options all have Shariah laws of Islam at the heart of them. The Shariah-compliant loans have been proven to be beneficial for everyone rather than the conventional loans.