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Learn How Interest-Free Banks Based on Sharia Work and How This Model Moves Trillions of Dollars Around the World.
These financial institutions primarily operate in countries with a Muslim majority, but they are also present in Europe and Asia, following the principles of Sharia, Islamic law.
In these institutions, money cannot generate interest, as this is considered prohibited by religious tradition, which understands that profit should come from the real economy and risk sharing.
Thus, instead of charging fees on loans, these banks structure operations based on partnership, buying and selling, or leasing.
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Unlike a conventional bank, where the interest rate is the center of any contract, interest-free banks operate with a different logic. The focus shifts from fixed income to sharing in the results.
Interest-Free Banks and the Logic of Sharia on Money
Sharia establishes principles that guide the lives of Muslims, including in finance. One of the fundamentals is that money should not, in itself, generate more money without work, production, or risk involved.
Therefore, charging interest is seen as an improper practice. For this tradition, any interest would already be considered excessive, approaching the concept of usury, which is the abuse of charging.
Additionally, the allocation of resources must respect ethical criteria. Sectors such as alcohol, gambling, and tobacco, for example, are excluded from investment portfolios.
Why Do Interest-Free Banks Reject Interest?
The rejection of interest did not arise solely in Islam. Historically, Judeo-Christian traditions also condemned usury.
Over time, the West relaxed these rules and created legal limits for usurious interest rates. In the Islamic case, however, the interpretation has remained more restrictive.
Thus, Sharia understands that money is merely a medium of exchange. It facilitates transactions, but it should not have intrinsic productive value.
How Do Interest-Free Banks Make Money?
Although they do not charge interest, these institutions do not operate at a loss. On the contrary, they seek profit, but within specific rules.
One of the most common ways is direct participation in projects. The bank invests capital and shares the profits — and also the losses — with the partner.
This model is similar to venture capital. The division can vary, such as 80% for the investor and 20% for the entrepreneur, depending on each party’s contribution.
Interest-Free Banks in Real Estate Financing
When a person needs to buy a house, for example, there are alternatives to traditional loans. One of them is leasing.
In this format, the bank acquires the property and the client pays installments for its use. At the end of the contract, ownership is transferred.
Another possibility is the temporary partnership. The bank and the client jointly buy the property, and the buyer gradually acquires the institution’s share.
There is also the resale model with markup. The bank buys the asset and resells it for a higher, pre-agreed price, including its profit margin.
Savings Account in Interest-Free Banks
Those who deposit money in a savings account also find differences. There is no fixed return tied to interest.
Instead, the client may receive a share of the profits generated by the activities financed by the bank. In other words, the return depends on the actual performance of the investments.
Thus, risks and gains are shared. The model reinforces the idea of partnership rather than a traditional creditor-debtor relationship.
Global Growth of Interest-Free Banks
Although based on ancient principles, these institutions consolidated mainly starting in the 1950s and 1960s. Growth gained momentum in the 1970s, driven by the oil boom.
Investors looking to invest their money in line with Sharia began demanding alternatives compatible with their values. From this demand, a robust industry was born.
In 2022, financial assets managed under Islamic principles totaled about US$ 4.5 trillion. Projections indicate that this volume could reach US$ 6.7 trillion by 2027.
Where Are Interest-Free Banks?
More than 70% of these assets are managed by interest-free banks, present in 77 countries. The highest concentration is in the Gulf States.
Southeast Asia follows, along with regions of the Middle East and South Asia. Africa and Europe are also involved, but to a lesser extent.
In Latin America, however, this model has not yet established itself. There are currently no Islamic banks operating in the region.
Why Are There No Interest-Free Banks in Latin America?
Experts point to two main factors. The first is the low Muslim population in the region, which reduces demand.
The second involves legislation. For interest-free banks to operate fully, specific regulatory adaptation would be required.
This would necessitate political will and public debate. So far, the topic has not prioritized on Latin American government agendas.
The Social Impact of Interest-Free Banks
The expansion of this model has also helped increase financial inclusion in Islamic countries. Many people avoided conventional banks for religious reasons.
With alternatives aligned with Sharia, part of this population began to integrate into the financial system. Thus, more individuals were able to move money in a way that is compatible with their beliefs.
Therefore, interest-free banks represent more than a distinct economic model. They translate cultural and religious values into modern financial practices, moving trillions and redefining the relationship between money, ethics, and profit on the global stage.
Source: BBC
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