The difference between traditional and Islamic personal Finance

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The demands of life, the lack of income resources, and the cost of living have led many individuals to consider obtaining loans either to repay debt or to open a project that eases the burden of life and generates additional income. In the current period, personal loans have become a safe haven for many, especially since the procedures for obtaining them have become easier than ever.

Loans are amounts of money provided by banks or financial institutions to their customers, after determining the borrower’s financial ability to pay. This procedure differs from one bank to another according to their terms and conditions.

Among the various types of loans, personal loans are the most common, in which the individual, whether citizens or residents, can obtain money from banks under certain agreements.

This includes personal income or any financial proof of the value of non-current assets such as land, real estate or motor vehicles. This guarantees that the bank is able to get back the loan value if the borrower fails to repay it during the time allotted.

Depending on the nature of banking services provided, there is also a classification of personal loans depending on whether they are conventional or Islamic.

The difference between the two types of loans is that the loans granted by Islamic banks to their customers depend on the laws of the Islamic Sharia. These laws govern all transactions of such banks, such as Murabaha, leasing and Ijara, in order to avoid economic activities involving speculation, or any other transactions that violate Islamic values.

In conventional banks, loans conditions are based on what the bank deems appropriate and not on Islamic law.

Another fundamental difference is that conventional banks offer depositors “interest” on their deposited money, and take “interest” on the borrowed one, unlike Islamic banks that do not do this to avoid Riba. Therefore, we find that there is no room for the term “interest” in Islamic banks. As for customers who fail to repay loans, conventional banks charge additional “interest”, while Islamic banks do not.

Therefore, individuals who seek a personal loan usually tend to use Islamic banks, especially in Islamic countries, to avoid paying the interest amounts required by traditional banks.