Islamic Finance as an Alternative for Supplementary Loans in Commercial Banks: A Descriptive and Analytical Study of Alternatives

Abstract

This research aims at presenting the Shari’a rule on the supplementary loan in its original form and the new form of murabaha, , and tawarruq, using a descriptive and analytical approach. The research concluded that the traditional form of supplementary loan should be prohibited. However, providing the client with murabaha-based finance, which is separate from the original form of financing, to purchase commodities is permissible, if the conditions of the Shari’a are applied, since they depend on the legality of the sale. In addition, the research concluded that tawarruq is permitted by the Shari’a provided that it meets the conditions of a true sale as defined by the Shari’a. Finally, the research reached the conclusion that both organized and reverse tawarruq in addition to inah should be prohibited since they involve collusion between the client and the Islamic bank to collect an amount of cash currently and pay more than this amount in the future, which is considered to be usury, or riba.

Keywords: Islamic Finance, Alternative, Supplementary loans.