Muadh_Khan wrote:
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Interest Based:I can lend you 5,000 USD and you pay £153.89 for 36 months at the rate of 7%
Service Based: I can lend you 5,000 USD BUT I say for my Services you need to pay me back 5,540.20 and you pay £153.89 for 36 months
I feel the difference ought to be made a little more clear here.
Service Based banking as in many Islamic Banking do not peg the service fee to the capital. So while as a benchmark they may caculate the Service Fee for the above financing to be £540.20 over the 36 months, Should the individual pay out the entire financing in 20 months, he would still be paying the full £540.20 service fee for this particular financing.
In the conventional interest based financing, since the interest payment is pegged to the capital and the repayments, if the entire sum is paid in 20 months instead of 36, then the debtor is theoretically entitled to seek a discount on the entire term to reduce the full repayment. It is quite possible that the banks may try to go around this by making further changes to their model, but I have seen conventional contracts where such discount is mandated or claimable by law.
In essence, both have a difference where the service fee does not change with the term. And the opposite of above would also hold true in the two models. If a person delays the payments, then beyond 36 months, the base interest rate of 7% will still be charged, plus any penalty that may come forward. Where as in the service based islamic banking, the bank will have a big challenge to figure out how to penalize the delay since they cannot just charge penalty upon the delay in the loan as that would be Riba'.
