How Does an Islamic Personal Loan Work?

What is an Islamic Personal Loan?

Adhering to the Shari’a and Fiqh, Islamic Personal Loan in the UAE follows the Quran, Sunnah, and Hadith to offer money borrowing facilities to customers. The Islamic Personal loan in UAE does not charge any interest for the money borrowing facility. To make personal loan Shari’a compliant, banks change the mechanism of loans. In an Islamic loan, the bank does not give you the money but purchase it on your behalf. Once you have paid the entire amount for the purchased product, the ownership of the product is legally transferred to you. The bank may sell the product to you at a higher cost. Following the laws of Shari’a, the bank may not grant you an Islamic personal loan for commodities and activities prohibited by Islam.

Who certifies if the personal loan is Islamic/Shari’a compliant?

The UAE has a Shari’a Advisory Council which oversees the activities of the bank. This body carefully evaluates the features of a product before certifying that the product is Shari’a compliant and hence Islamic.

How does an Islamic Personal Loan work?

The concept of Islamic Personal Loan in the UAE involves the transaction between the bank and the customer on an installment payment basis. There are two ways in which the bank grants Islamic Personal loans i.e. Murabahah or Tawarruq.

In the Murabahah Islamic Personal Loan in the UAE, the bank purchases on your behalf and lets you pay for the purchased product in installment. Here the bank does not charge you interest but sells you the purchased product at a higher price to replace the method of earning.

The Tawarruq option finances your purchases in a different method. In this option, you buy the commodities from the bank to sell the commodity to a third party. You will require paying for the cost of the purchase along with the bank’s rate of profit. The bank will not expect you to pay for a certain period.

Once you have procured the commodity from the bank and you can sell it to a third party and earn cash. At this point, the bank expects you to pay your first installment for the initial purchase.

Let us say that you borrow AED 100,000 as an Islamic Personal loan in the UAE from a bank. You can negotiate the tenor of payment with the bank and receive the maximum tenor for repayment as per the norms of the bank.

Now, instead of giving you the money, the bank will buy commodities worth AED 100,000 on your behalf. This commodity can be anything from a food item to any other material except gold, silver, and other currencies. Now you will owe the bank AED 100,000 plus the rate of interest amount (let us assume) at 4%. Therefore, now you owe the bank AED 104,000.

So far, you own the goods of AED 100,000 and owe the money to the bank. Now to repay, you will need to sell the commodity to the third party to earn profits and repay the loan to the bank. This type of Islamic Personal loan in the UAE is usually preferred for business.

Difference between Personal Loan and Islamic Personal Loan