Islamic banks do not lend money at interest. Instead, they enter into Sharia-compliant contracts that involve real assets and genuine risk-sharing.
Murabaha (Cost-Plus Sale)
The bank buys an asset and sells it to you at a disclosed markup, payable in instalments. The profit is fixed upfront — not variable like interest.
Example: You want a car worth £15,000. The bank buys it, then sells it to you for £17,000 payable over 3 years. The bank's profit is the £2,000 margin.
Diminishing Musharakah (Shared Ownership — used for homes)
The bank and you jointly purchase a property. You pay rent on the bank's share while gradually buying it out. As your ownership grows, your rent decreases. When you've paid the full price, you own 100%.
Example: House costs £200,000. Bank owns 80% (£160,000), you own 20% (£40,000). Each month you pay rent on the bank's 80% + an amount to purchase more of their share. After 25 years you own 100%.
Ijara (Lease-to-Own)
Bank buys an asset and leases it to you. At end of lease, ownership transfers. Similar to hire purchase but structured differently.
Musharakah (Full Partnership)
Both parties contribute capital and share profits and losses. Used for business financing.