You want to buy a house for R 1 000 000 and finance it through a conventional bank. You end up paying R 1 500 000 over ten years. You want to buy a house for R 1 000 000 and finance it through an Islamic bank. You end up paying R 1 500 000 over ten years. Both transactions appear precisely the same. Is there some difference or is shariah banking merely a scam?

Simply because the outward appearance is the same doesn’t mean the ruling will necessarily be the same. Things may become halal via a slight change in the process. One example is the slaughter of chicken. Two chickens are born and grown together. Chicken A is slaughtered the halal way, chicken B isn’t. When they are eventually roasted they may look precisely the same yet one will be haram, the other halal, simply because the process of slaughter was different.

Despite the similar outward appearance, the difference between conventional and shariah compliant banking is the process. In simple terms, a conventional bank will use money to make money via interest. The bank will pay interest to depositors and will charge interest to lenders. In shariah compliant banking the bank will use shariah compliant transactions instead of charging interest.

One simple example of shariah compliant financing is diminishing musharaka. The process is as follows:

·         The client is short of funds for a house so he approaches a bank. They agree to purchase the house on an 80/20 ratio. The bank now owns 80 % and the client 20 %.

·         The client will live in the house and pay rent for the bank’s portion.

·         In addition to paying rent the client slowly buys the bank’s portion. Overtime the portion owned by the bank will be reduced and the portion owned by the client will increase.

·         Eventually the client will buy the entire portion owned by the bank.

This way the client is able to buy a house despite not having all of the funds and the bank will make a profit.

There are many different types of shariah compliant transactions used by banks and they all have their own nuances. This article can’t go through all of them. However, since justice, balance and equitable wealth distribution are all objectives of the shariah, they tend to have similar characteristics such as:

·         Being asset based

·         Sharing of risk

·         Profit and loss sharing

·         Avoidance of riba and other haram elements

Needless to say that due diligence should be followed to ensure that those who claim they are shariah compliant actually are. A mere shariah certificate isn’t proof of compliance.

Allah knows best