The popularity of Islamic finance is increasing among UAE residents. Based on a report by Ernst & Young, by 2019 sharia-compliant assets in the UAE are estimated to grow to $263 billion, compared to 2014 where Sharia-compliant assets were around $ 1 billion. With banks increasingly offering a wide range of Sharia compliant finance options, UAE consumers are no longer limited to just conventional banking products.
If you’re looking for Islamic financing, here’s how you can better understand your options.
How is a Shari’a compliant personal finance different from other personal loans?
As ‘interest’ is forbidden in Islam, Shari’a compliant personal finance products adopt the use of commodities using a ‘Murabaha’ structure. It’s a fairly straightforward transaction:
- The individual seeking cash will be assessed for credit worthiness (just as he/she would with a conventional bank).
- When approved, the customer is sold a commodity on deferred payment terms (installments), which includes a profit mark up.
- The customer is free to actually collect the commodity. However, most retail customers would then authorize the bank to sell the commodity to generate cash.
- The difference between the commodity selling price (for cash) and the sum of the deferred payment price is effectively the profit that the customer pays to avail the convenience of deferred monthly payments over a fixed period of time.
At the end of the transaction, the customer is able to access cash in a matter of hours.
Related: Islamic banking – How does it work?
Is a Shari’a compliant personal finance cheaper than a personal loan?
Not necessarily. The profit mark-up charged on Shari’a compliant personal finance is a function of several factors, including internal costs, market pricing and the bank’s risk appetite. However, apart from the profit rate charged, there are some intrinsic financial advantages of a Shari’a compliant personal finance.
What are the advantages of applying for a Shari’a compliant personal finance?
The amount of profit or mark-up charged to an individual is fixed for the entire duration of the personal finance contract. With a conventional personal loan, events such as missed installments and/or installment postponements results in additional interest being charged to customers. This is not the case with Shari’a compliant personal finance as the profit amount is fixed in advance.
Waleed Barhaji is a professional with more than 16 years of banking experience. He is one of the few Emiratis that has experience in different aspects of banking; such as operations, corporate banking, branch banking, channels distribution and product management in both national and international banks. He is currently the Business Head of Consumer Finance in Noor Bank. He previously worked at Citibank, Mashreq Bank and Union National Bank.