Re: Sharia and Economy split from: Why do US officials say such things in Pakistan?
Islamic banks don't really work with interest - they work with profit/loss sharing ratios. They have operate similarly to interest, giving returns on deposited assets, but the difference is that the financial risk is split between the two parties when an profit/loss ratio is applied.
Islamic banks present on the surface a face similar to conventional banks - but behind the scenes, the ownership of assets, the split of returns and losses, and other financial and regulatory details are different.
The example of Islamic banking shows that shariah compliant economics is not that different from conventional economics. However, differences exist which are important from a religious perspective.
A simple example is a form of Islamic house mortgage.
In a conventional mortgage, you may borrow $100,000 to buy a $100,000 house. The house belongs to you legally from Day 1, the money is secured against this asset that you own. The bank charges you interest on the borrowed money, and so you may end up paying back $125,000. You generally don't have a fixed interest rate for the whole loan - you have a rate that is locked for a period of up to several years, or you have a variable rate mortgage. So you don't really know exactly how much you'll pay back.
However, Islam prevents you from making profit from a loan - it counts as Riba.
So how could an Islamic bank turn a profit? The bank would use it's own money to buy the $100,000 house, and then allow you to move into the house that it now owns. The agreement between you and the bank is that every month, you will hand over to the bank a certain amount of money that will build up over the years. Once this sum reaches $100,000, it will be used to buy the house from the bank at the price of $100,000.
However, since you are living in the bank's house, you will also have to pay it rent each month, for it is your landlord. By the time the amount you save each month reaches $100,000, you may have paid the bank $125,000 in rent. hence the total amount the bank receives is $125,000
In other words, despite the ban in interest, you can still provide a financial service in a profitable, interest-free way. Allah SWT has seen fit to give us loopholes in his mercy :) . Let us use them, Aameen.