replied"All Islamic banks have three major ways of doing business without paying or receiving interest which is vehemently prohibited in the Quran, the ultimate divine revelation and guide to all Muslims.
They trade, they lease assets, and they enter into joint ventures or business partnerships as equity holders with other investors and clients and share profits.
1) In trading, they finance acquisition of commodities and assets for business men based on request, deliver and and earn a profit. It’s called cost+profit. The client would then pay the sale price in installments, as mutually agreed. Once the sale price is agreed it cannot change no matter what, which is different from interest that can compound if there is delay in payment.
2) in leading, the bank acquire equipment, automobile and property and lease them for a rental.
3) In joint ventures the bank acquire equity in a business and jointly manage it with the client. The bank and the client will agree on a profit-sharing ratio either based on capital contribution or any agreed formula. If the profit is declared it is shared.
4) The bank can also finance an entrepreneur but not part of the business and agree on profit sharing. If there are looses the bank assume the entire loss so as not burden the entrepreneur.
5) The bank also provide other services such as financing Letters of credit, provision of guarantees, other agency roles for a fee.
It also invests part of its portfolio in low risk Islamic securities such as sukuk, stocks, real estate investment trusts, venture capital and private equities in line with Shari’a standards.
In all these the bank takes its customers as partners and doesn’t lend cash/money with an underlying asset. Financing is not about creditor-debtor relationship. There must be an asset to back any transaction. The bank also shares its business profits with its customers."
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