What Is Islamic Personal Loan and How Does It Work?

Financing in Islam is an extensive, but detail-oriented, and meticulously developed subject. Unfortunately, there is not enough reliable info about topics such as Islamic personal loans online. If you’ve ever wanted to know more about these loans, we’re going to help you out. Read on to see what is Islamic personal loan and how it works. 

What is an Islamic personal loan?

Islamic personal loan or Islamic finance is a loan based on the Sharia law, the Islamic religious law, as stated in the Quran, Hadith, and Sunnah. The personal loans are preferred means of short-term credit in countries where Islamic banking applies. But the whole process is different than conventional loans.

Unlike conventional loans where the money is a commodity in Islamic financing, there is no money to be borrowed. Instead, the bank “purchases” the item for the borrower, i.e., client, and sells it at a higher price.

Sharia-compliant loans are versatile, actually. Bank clients have the option to take wedding loans, student, travel, health care loans, small business financing, just to name a few. 

Although the term Islamic personal loan can make you think it’s reserved for Muslims only, the reality is different. Anyone, whether a Muslim or not, can apply for Islamic personal loans if eligible. 

How Islamic personal loans work?

Islamic personal loans generally require some form of collateral such as services, home, car, or something like that. Of course, all this depends on whether a client meets the eligibility criteria. Then, the bank provides the loan and buys products or services directly from the provider and resells it to the client at an agreed profit rate, as mentioned above. The profit rate is a common variant and usually comes with takaful-based loan insurance.

But, some people apply for unsecured loans, and they’re a bit different. In this case, the bank plays the role of an agent for the customer. Then, the bank sells a commodity it has in the books, e.g., sugar, metal, or others to a third-party broker. The cash is remitted to a client’s account and acts as a loan. What happens next is that the client pays the price for the commodity or service back to the bank. This is done in deferred installments with a profit rate.

To avoid price-related risks and complications, the buying and selling of the commodity are conducted on the same day. 

What is the difference between asset-backed and unsecured personal loans?

The first option function either on the concept of a lease, deferred payment contract, or hire-purchase contract. The bank buys the commodity on your behalf and resells it through repayment installments and rental fees until the loan is paid off. In the second scenario, the bank buys commodities and sells them to you at a profit.

Islamic personal loan concepts described above are called Murabahah and Tawarruq. It’s worth noting that the bank is not allowed to charge interest on the loan. 

How can I get a loan from an Islamic bank?

As mentioned above, Islamic personal loans are not reserved for Muslims only. Everyone can apply pending they meet the eligibility criteria.

The eligibility criteria may vary from one Islamic bank to another. But most banks in the UAE have some criteria in common. They are:

  • Minimum 21 years of age
  • Length of service ranging from one to six months
  • Minimum salary ranging from AED 3000 to AED 5000 (depending on the bank), in some cases it may be as high as AED 15,000
  • Salary transfer required 
  • The maximum age for UAE nationals is 60 years and 65 for expats.

Keep in mind that some of these eligibility criteria can still vary from bank to bank. For example, some banks may not require a salary transfer.

Besides meeting the eligibility criteria, you also need to submit the required documentation. Each bank can have its own rules and documents they want clients to submit. In most cases, you need to submit the following documentation to get Islamic personal loan:

  • Loan application form (completed)
  • Trade license (if you’re self-employed)
  • Bank statements (last three to six months)
  • Identity documents (ID, passport, and similar)
  • Copy of valid passport with valid UAE residence visa (for expats)
  • Salary transfer letter or certificate

The best Islamic banks for personal loans

The choice of the best Islamic banks for personal loans depends on your needs and preferences. It comes down to your budget, goals, and whether you meet their eligibility criteria or not. However, some of the most popular options include Abu Dhabi First Bank, Abu Dhabi Islamic Bank, Emirates NBD, Emirates Islamic Bank, CitiBank, and others.


Islamic personal loans are convenient, simple, and don’t include interest like conventional loans. Based on Shariah principles, Islamic loans are transparent, fair, and without unnecessary complications. Everyone can apply. Just get informed about the specific eligibility criteria of your bank.

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