Interest Free Loan/Financing

Perhaps many of us still confuse between interest bearing loan and interest free loan which is one of the main concept of Islamic finance. We have been living in an interest bearing environment for decades and we find it rather weird to offer a loan without the interest. What is the rationale?

Perhaps we can look at it as follows. There are only two legitimate reasons for you to give some money to someone else. You may give because you want to help him or gain some profit out of his activities which involve your money. Should you give just to help him then you are ONLY entitle for the principal given with no additional above it. In other words, if you give RM1000 then you have the right to receive RM1000 back with no condition on the time frame. Next, if you give the money with the intention to enjoy some of the profits then you must also be willing to share the losses if any. For instance, if you give RM1000 and agreed for a 50/50 distribution basis on the profit then if the activity resulted in RM200 profit you are entitle for RM1000 + RM100 = RM1100. On the other hand, should the activity lead to a loss of RM200 then you are entitle for RM1000 - RM100 = RM900.

I guess the above examples are simple and easy to understand by all. We will discuss more on several methods and concept pertaining the Islamic Finance in future articles. The most common arrangements are mudharabah and murabahah concept however there have been several 'innovations' in Islamic Finance today arising from extensive researches by scholars and professionals.

Thus, interest free financing does not mean that the financier cannot make any gain from his initiative to lend the money to the other party. We will explore all those methods in Islamic finance which permit such exchange of money between two parties.