Islamic Business Loans

Recently there has been an increase in demand for business loans designed for managers who wish to operate according to Islamic Sharia law. All business and economic activities undertaken by Muslims should abide by this law, which is based predominantly upon the teachings of the Qu'ran and Sunnah. Since it is unethical within the Islamic faith to make money from money, in other words, to charge or receive interest payments (known as 'riba'), Islamic business loans are managed differently to traditional business loans.

Islamic loans are normally based on profit sharing between businesses and banks, or 'lease to purchase' agreements; for example, business loans tend to be issued according to a principle known as 'Murabaha', whereby the property or goods are bought by the lending institution, and then eventually purchased back by the business over a period of time, until the commodity is paid. This will include a profit margin for the bank which will have been agreed in advance.

Lenders are increasingly realising the need for finance options which ethically accommodate the Islamic faith, and most UK banks (specialist and non-specialist) now offer a range of loans and accounts which abide by Sharia law. Whilst these business loans tend to be competitive with interest-charging business loans, it is possible that Islamic loans may cost more overall, due to the administration costs of the two transactions involved (firstly between the seller and the bank, and secondly between the bank and the borrower).

Many lenders stress that loans designed to accommodate the Islamic faith are not just available to Muslims, but in fact to people of any religious background who wish to run their business in an ethical way. You will not be permitted a business loan if your organisation deals with goods or services which may be regarded as unethical, for example alcohol and gambling.