This is a financing method that is used to finance small projects. The idea of this type of financing is that the bank charges a profit for its services. This type of agreement starts with the client asking the bank financing to complete the purchase of a specific asset or to even pay any outstanding debt that the client has with a third party.

In the case of an asset purchase, the bank buys the asset and retains ownership. The bank then lets the customer know about the cost of the asset. The bank also lets the customer know about the profit that it will charge. While this looks like charging interest RIBA, this is not like that. The difference here is that the bank will own the asset. The client pays the bank in installments which are predetermined when the contract is initially signed. The contract will include the cost of the asset, the bank’s profit, the length of the installment period, and the installment amount. The client agrees to the terms and then when the bank purchases the asset, the client uses the asset while it pays the installments. The installments include the total cost of the asset and the banks’ profit. When all the installments are paid out the client gets ownership of the asset. The bank then initiates a second contract that passes ownership of the asset to the client.

In both cases, there is transparency. The client and the bank know beforehand how much the asset costs and how much is the bank’s profit. This type of open arrangement makes the deal fair for everybody. There is one drawback of this type of financing and that is that the bank incurs more risk than the customer in the case that the banks pay debts that the client has to other creditors.

If the client defaults on the bank, there is not much that the bank can do. There is a small detail here. If the client is facing genuine hardship and it can prove this, then yes, the bank does not have many options, as the Quran acknowledges this as a part of life and reality. If, however, the default is willingly done, and the client is not facing life hardships then the court can resolve these issues easily.