Very few Americans are aware that Islam forbids the paying or collecting of riba (interest)1. But if Muslims cannot charge, pay or earn interest how do Shariah-compliant Banks make money? How does a Muslim finance the purchase of a house? What is the point of a savings account if you can't earn interest?
Actually it is very simple: through Murabaha (Deferred Sale Finance)2 transactions. You appoint the Islamic Bank to act as your broker to purchase and sell Sharia compliant commodities on your behalf. Here's how it goes down:
1) You go to your local Shariah-compliant Bank and say, "I have $10,000 I would like to put in a savings account. Obviously I cannot earn filthy lucre through interest, but I would like to make some profit through investment. Is there some business that I can invest in that will make me clean profit?
2) The bank says, "Yes, we see that today's spot (current price) of gold is $665 per ounce. We also notice that the forward delivery contract 180 days from now for gold is $690 per ounce. That is to say, someone in the financial world promises to pay $690 an ounce for gold six months from now. They are willing to lock in that price now in order to avoid the risk of having the gold cost more later. Appoint us as your agents and we will buy $10,000 worth of gold now and we will sell it for $10,376 six months from now. We will deduct a small commission for ourselves of $36.00 for the two transactions leaving you with an investment profit of $340.00."
3) 180 days pass and you collect your investment profit and you start the cycle over again.
To put it in very simple terms, if you wanted to borrow money from a Muslim friend, here is how you can do it and remain Shariah-compliant:
You: "Mahmood, I would like to sell you my sweater for $10.00."
Mahmood: "Sure, here is $10.00"
90 days later:
You: "Mahmood, I really miss my sweater, can I buy it back for $11.00?"
Mahmood: "OK here's your sweater (or contract to buy and sell the sweater). Hmmm. seems I made a dollar profit. How nice."
Notes:
1 Riba is the (Arabic: ربا) term for usury, the charging of interest, which is forbidden by the Qur'an.
2 Murabaha can be used to mortgage a home, or earn profit on a savings account, or finance business transactions.
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