Does it make sense for a non-Muslim to take a loan from an Islamic bank?

Which is best for loans - Islamic banks or conventional banks? An expert and a client of Islamic banking offer their advice.

I want to take out a loan and have seen good rates in conventional and Islamic banks. I am a non-Muslim so I am wondering if it makes any difference which bank I choose to take a loan from. Also, what fees am I likely to pay depending on which type of bank I decide to borrow from? NA, Dubai

The expert advice

Philip King, Head of Retail Banking, Abu Dhabi Islamic Bank (Adib)

Islamic banks are welcoming to non-Muslims and Muslims alike, so this should not be a consideration when you are looking at taking out a loan. You should concentrate on comparing rates, and importantly, the conditions of the financing, customer service and the bank's ethics. Surveys conducted for Abu Dhabi Islamic Bank (Adib) have shown that most customers really value straightforward, simple and transparent banking – for example, they want the full terms and conditions made clear so that there are no misunderstandings.

Islamic banks use the term “profit rate” rather than “interest rate” because of the way financing is structured – not as a loan, but as the purchase and resale of a real asset, which can be a car, house, a commodity or a stock, depending on the type of financing you are looking for.

One of the most common forms of Islamic financing is called “murabaha”. Here, the bank enters a contract to buy an asset on behalf of the customer and re sells it to the customer at a marked up price which is then re paid in instalments over a fixed period of time.

There are certain benefits to the customer over conventional loans. The amount to be paid by the customer is fixed for the entire period at the beginning of the term, so does not increase even if the financing term is subsequently increased. There are no late payment charges and no compounding of profit. Because of the way the financing is structured, the customer agrees to make payments throughout the full period.

Islamic banks tend to work closely with their customers and are considerate if their circumstances change. For example, Adib offers job loss protection to customers who have taken out a murabaha financing product. This entitles them to a six-month break on all repayment instalments on personal and vehicle financing, in the unfortunate event of losing their job.

The reader’s advice

Joy Fernandes, Dubai

I am a non-Muslim as well and had a similar dilemma a couple of years ago. In the end I went with the Islamic finance option simply because the bank offered the best rate at the time. I also switched my salary account to the Islamic bank as that helped me secure an even lower profit rate on the loan.

My loan has been calculated using the murabaha method. For customers like me, who want cash, the bank buys stocks on a local exchange such as the Dubai Financial Market and sells them back to the customer at a profit. This method released the cash to me and I have a three-year loan with fixed monthly repayments.

When it came to fees, I had a loan processing fee of Dh500 to pay on top of the profit rate for the loan itself. At times I have paid off lump sums of the loan to reduce the tenure of the loan. When that happens I have to pay a fee of 1 per cent on the amount I am paying back. But I still gain as by paying off the loan early, I also pay less interest on the loan overall.

The other benefit of taking on an Islamic loan and an Islamic bank account, particularly from a local bank, is that I have found the bank offers far more product options than the conventional international institution I banked with before.

As a result I have also opened a prize-linked savings account at the Islamic bank and a savings account that rewards me with air miles the longer I hold the money in the account.

Next month’s Money Clinic:

There are a couple of international brands that I would like to buy shares in but to do so I would have to access local stock markets. One of the brands is listed on the New Zealand stock exchange and the other on the Singapore Exchange. As someone new to the concept of buying stocks, what is the best way of investing in these companies from here in the UAE? P D, Abu Dhabi

Every month The National features a reader's personal finance problem. If you have an issue or would like to suggest a solution for another's reader's concern, write to [e-mail]