A loan that interest cannot be charged on. Instead, the loan is structured using discounts, sale or lease, profit participation, or repurchase agreements.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
Any form of financing made according to Islamic law, which forbids the payment or receipt of interest. An Islamic loan may be an interest-free loan, but often it is a more complex transaction. For example, a bank could buy an asset for cash and then re-sell it to the "borrower" for a profit such that the profit is the same as the bank would have made had it extended a regular loan. Other types may involve the bank becoming a partner with the "borrower" so that both co-own the asset or business that the loan finances, and the borrower gradually buys the bank's share of ownership with a series of payments. Strictly speaking, most Islamic loans are partnerships or joint ventures, but they are called loans because they accomplish much the same thing as conventional loans. See also: Islamic finance, Murabaha, Mudharaba, Musharika.
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