The Differences Between Islamic Finance and Conventional Loans

Understanding the difference between Islamic finance and home loans and the more conventional variety is important for practicing Muslims. It can mean the difference between adherence to your faith and sharia compliance or straying off course.

Those of you who practice this faith understand that Islam is much more than just a religion. It’s a way of life that deals with several factors including political, economic and social issues. Both Islamic finance and conventional loans have their place in the overall financial scheme of things.

Here’s a few differences between Islamic finance and those more traditional loans.

Risk

For many scholars and experts on Islamic finance, everything comes down to the different ways that risk is treated. With Islamic loans interest is prohibited. That means that if the business is financed with any kind of debt that requires interest being paid, the risk for that business is not being shared properly according to sharia law.

Sharia law dictates that Islamic finance levers the principle of loss and profit sharing. There are several different types of contracts and each clearly outlines how this risk is shared. Islamic finance and loans rest on the principle of social justice. The idea of earning interest or riba runs contrary to the Islamic belief that money should be used to support people and their activities.

In the end, the concept is really simple. By sharing a risk among two or more individuals, the danger from that risk is lessened.

Who We Are

When people ask us about the differences between Islamic finance and more traditional loans, we have the answers here at Ijara CDC. We are a nonprofit corporation that helps structure sharia compliant home loans for buyers in the US and Canada. Ijara Community Development Corporation started operating in Canada in 2008 and in the United States in 2005.

We are not an investor, lender or bank. What we do is connect home buyers with the right kind of sharia compliant structure.

With Islamic financing, there is also our sharia board involved. This is made up of Islamic scholars who give out their advice and opinions on how best to conduct sharia compliant business contracts. Sharia compliant business deals and Islamic finance loans need to avoid certain things. For example, speculation and gambling are prohibited. Islamic finance is also clear that all investing needs to be done ethically.

Islamic Guidelines

We make sure that our Islamic financing method obeys all the guidelines that Islam provides. That way consumers who use our services can be sure they are staying sharia compliant. We work constantly towards simplifying the process.

Why not let us help you simplify the process of purchasing a home or swapping an existing mortgage out? The alternative choices that we provide are popular with both practicing Muslims and non-Muslims both.

Keep in mind that the structure we use also fits in with the traditional banking systems. It’s a carefully thought out and executed way to buy real estate and stay sharia compliant.