Islamic banking and finance

Islamic banking refers to a system of banking which is consistent with Islamic law. In particular, Islamic law prohibits the collection of interest. The main argument is that money is not a good and profit should be earned on goods only; not on money itself. (Return on Assets).

While Islamic law prohibits the collection of interest it does allow a seller to resell an item at a higher price than it was bought for. So in a mortgage transaction, instead of loaning the buyer money, a bank would buy an item and resell it to the buyer at a higher cost and allow the buyer to pay the bank in installments. The higher cost would include what would normally be charged as interest. This is called "Murabaha". Another approach is Ijara wa Iqtina, which is similar to real estate leasing.