Islamic banking also referred to as Shariah-Compliant Banking, gets regulated by one of the highest Islamic financing Shariah Advisory Council (SAC) of Bank Negara, Malaysia. This shariah council primarily ensures that all the Islamic personal loans granted in Malaysia follow the strict principles of Shariah and free from the following practices:
Haram: Any business that involves adultery, gambling, khamr and more
Riba: The practice of charging hefty interest rates.
Gharar: A business where the sales seem skeptical and risky.
Zulm: it is the unfair and cruel practices that end up harming others.
How does Islamic banking work?
Unlike mainstream banking, Islamic personal loans do not offer money to the borrower. The Islamic banks buy the specific set asset or commodity and sell it at a profit for the sake of financing.
Islamic loan works in a way where real purchase-and-resale of real commodities takes place so that it is Shariah-compliant or, in other words, Islamically acceptable. Bank Islam is not allowed to generate money out id money and commit riba/high-interest.
Are Islamic Personal Loans completely free from Interest-Rate?
The main difference between how conventional banking and Islamic banking works lies in their way of making a profit. Now you might be thinking Islamic banks are giving loans at a loss and not making a dime. Hate to break it to you, but they most definitely are making a profit.
So here is the thing, a conventional bank makes money through the interest rate they charge from each borrower. Whereas, the Islamic bank buys a commodity on behalf of the borrower, sells it at a higher price, and makes a profit. The profit is equivalent to the interest rate since interest is not allowed in Islam.
The benefits of Islamic banking include less late payment fees/penalty, the amount to repay remains fixed, and you do not have to pay early settlement fees either.
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