IslamicFinance.de

Muhammad Raza, Head of Commercial Banking at Meezan Bank, outlines the difference succinctly by using an often-quoted reference from the Quran that allows trade but forbids ‘riba’ or usury. He explains that riba is a form of a transaction that is impermissible in Islam.
The transaction is straightforward: the lender extends a certain amount of money to the borrower and the two enter a contract that obligates the borrower to return the principal amount and additional interest payments.
In the Islamic version of a loan, the lender can only claim the amount extended to the borrower and not more, while a gift, or donation, is a unilateral transfer or irreversible promise of transfer of asset.
Furthermore, he emphasises that the sale of an asset or claiming periodic payments for renting an asset is within the boundaries prescribed by Islamic law.
By using combinations of sale contracts, rental contracts, unilateral promises and equity contracts, Islamic finance has managed to mirror the cash flows of most conventional banking products. To stay competitive, Raza acknowledges that rental payments are linked to the more conventional interbank interest rate.