Islamic Finance - Choosing a suitable contract
Among other things, contracts for sales, leasing, partnerships, or joint ventures can be used to offer the same financial advantage that a traditional loan contract does. In Islamic finance, a person looking to buy a house might go to an Islamic bank to get the right financing because the ultimate goal is to be able to buy a house with credit. Instead of giving this customer the necessary loan, the Islamic bank will, at this customer's request, buy the desired residence from the vendor for a purchase or cost price. The customer will then purchase the identical home from the Islamic bank at the purchase price plus a profit margin, with the option to pay the selling price in installments. By doing this, the bank generates additional income through trading on a marked-up sale, whereby the difference between the buy price and the selling price would be viewed as profit gained by the bank rather than through loan for interest. A Murabahah contract is the basis of this kind of transaction. In the end, the customer is able to buy their dream home on credit without having to pay the bank any interest. In contrast to a cash sale, consumers must pay a greater price under a credit sale. The used sale contract serves as an alternative to a term loan facility under a traditional banking scheme for buying a house.
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