Tuesday, April 16, 2013

Islamic Financing vs Conventional Loan

Situation: Ali want need money $5000 to buy motorcycle. He got two best friend, Ahmad and Jefry which offer to give him money with some condition.

Jefry said: I will give you $5000 and you need to pay back to me $6000 within two years.

Ahmad said: I will buy the motorcycle for you and will sell back to you with price $6000. You can pay it within two years.

In this situation Jefry is offering money. The $1000 extra is called interest. This is Conventional Loan.

Meanwhile, Ahmad is offering Motorcycle (asset) which he bought with price $5000 to Ali. After he sell back the motorcycle to Ali, he will get profit $1000. This is Islamic Financing.

 Islamic Financing transaction is based on asset and agreed profit.
Conventional Loan is based on money and agreed interest.

Both transaction have contract or agreement to secure the payments. In Islamic Finacing, the agreement or contract is called Akad.

This is just a very basic term of Islamic Financing. For more details you can learn from expert or more knowledgeable person.