The bank does make money on the loan, but it's not structured as interest.
For example, you buy $100,000 house and get a mortgage from the bank. The bank owns the house. You pay the bank $1000/month for 15 years. Each month, part of the $1000 goes towards interest and part towards principal. Over the 15 years, you pay $180,000. At the end of 15 years, you own the house.
In the Muslim version, the bank owns the $100,000 house and sells it to the homeowner for a premium at $180,000. The bank breaks it up into equal payments so that the homeowner pays $1000/month for 15 years. At the end the homeowner has paid $180,000 just like in the traditional mortgage and the bank has made $80,000. But in this case, the $1000/month was all for principal.
It's essentially the same, but the second way can satisfy the religious requirement. You could argue that it's arbitrary and silly, but that can be said about almost all religious customs and requirements--meatless Fridays, disabling oven lights, avoiding interest, etc.
In fact, did you know that McDonald's added Filet-o-Fish to attract Catholic customers? They didn't want Friday sales to go down. I wonder what would happen today if they added a traditionally Muslim dish to their menu like a halal quarter pounder?
I would think there would be a lot of implications to this.
If the shariah-compliant financing was used to buy, for example, rental property, would the shariah compliant buyer be able to take higher depreciation deductions off the building because he bought at an artificially high price?
Is the bank liable for up-front short-term capital gains taxes because they essentially "flipped" a house to the shariah-compliant buyer? (Bank bought at $100k, sold--on paper--at $180k?)
Does the shariah-compliant buyer have a greater amount of asset protection in states that protect personal dwellings because his house has an artificailly higher value at purchase?
Does the shariah-compliant buyer still have to pay the full deal amount if he sells the house before the 15-year payment plan is up?(i.e., he paid $180k --to be done over installments over 15 years---for a $100k house. If his job moves him next year and he sells the house at $120, does he give the bank the $120K sale plus still have to pay $60K to the bank to satisfy the $180 artificial deal? Or is he let off the hook via and early pay-off mechanism?)
The corrollary to that is, if there IS consideration for early pay-off of the installments, then doesn't the shariah buyer have an artificial advantage when flipping houses? For example, the shariah guy buys a $100k house for $180k over an installment plan, but instead flips it for $200k in 13 months (long term capital gains). A conventional buyer makes a profit of $200k- $100k original price = $100k to pay capital gains taxes on. The shariah guy's profit ON PAPER is $200k-$180k = $20k to pay capital gains taxes on, but if the bank lets him off the hook for most of the $80k premium he paid via a pre-payment mechanism, his REAL profit would be $200k-$100k = $100k just like the conventional guy. Does the tax code have a mechanism to recapture the taxes of the $80k premium he was let off the hook for? Is it treated differently than the capital gains of the conventional guy?
Lots of questions here. I am not the tax/finance expert to answer them, though. Looks like opportunities for confusion and inequity to me.