If Islamic banks do not charge interest rates, how do they make

profits ?
Grégoire Mollier G4 BAI 3A – First Project of Finance and Development

Islamic banks are financial institutions operating under the laws and regulations of

Shariah. In fact, there is little difference between Islamic banks and other financial
institutions. In fact, most people have no idea how these institutions operate. However,
following Shariah law has a significant impact on how these banks are making money
and maintaining profits. Indeed, many Islamic banks do not charge interest. 
Muslim banks are expected to give all information to prospective investors and to
request all information from potential business interests in order to comply with this
requirement. A significant exception to this rule is that an Islamic financial organization
cannot sell what it does not possess. Because the danger of unavailability is so large, selling
anything you don't own outright is considered the riskiest option. I'd want to give two
examples of how no-interest banking affects business operations in Islamic banking
scenarios, because it's such a big aspect of Islamic financing.
It might be the biggest limitation and main characteristic that Muslim banks are
using. This is such a distinctive feature that in some non-Muslim countries where Muslim
banks operate, they operate under the general term "interest-free bank" instead of
Muslim bank for marketing purposes. Interest is not charged because of an interpretation
of Shari'a that "one must work for profit" and that simply lending money to those in need
does not count as a job. Money cannot be used to create more money. In order for a bank to
be considered Islamic, it must always provide some type of service to make its profits.
Let's start with the most basic scenario of opening a bank account. Customers can
open interest-bearing savings accounts at many traditional banks. Customers are
encouraged to invest and keep their money with the bank through promoting and marketing
interest rates. Savings accounts, on the other hand, are frequently offered or marketed in
Islamic finance based on a track record or profit/loss. Profits from successful transactions at
the Muslim bank are given to individual savings accounts. However, the ban has resulted in
losses.
Another example is the way in which Muslim banks deal with mortgages. Let's
imagine you want to buy a property that costs $350,000 right now. If you were to get a
mortgage from a traditional bank, you would be able to buy this house. You may get a
$300,000 loan from the bank (and you would put down the rest of the money). That
$300,000 is lent to you at a fixed rate of interest (let's say 6%). You will have paid the bank a
total of $647,514.00 by the time you pay off that debt.
A Muslim banking organization, on the other hand, does not believe in interest rates.
In this example, a Muslim bank would become actively engaged in the deal by purchasing
the house you're interested in outright, increasing the selling price by $60,000 or $70,000,
and then selling it back to you. The revised price of $360,000 would then be paid in
installments. In the end, you will have saved a significant amount of money.
Sources :
https://www.imf.org/external/pubs/ft/fandd/1997/06/pdf/iqbal.pdf
https://www.theguardian.com/money/2013/oct/29/islamic-finance-sharia-
compliant-money-interest
https://www.edology.com/blog/accounting-finance/how-islamic-banking-works/
https://aims.education/principles-of-islamic-banking/
https://www.dummies.com/personal-finance/islamic-finance/the-concepts-and-
principles-of-islamic-finance/
https://www.ciefsa.org/blog-megamenu/83-principles-of-islamic-banking