system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5: Islamic banking system. How is it different from interest?
gpt
There are two methods that can be used:

1) The bank acts as a traditional investor and just directly invests money into a project in exchange for an ownership stake.  This is usually what people hold up as being the definitive model used by Islamic banking.

The problem with this is that it only works for investments in which taking a long-term ownership position is a viable option.  IE, this works great when you're financing a startup or an established company that's ok with trading stock for cash.  It doesn't work *at all* for consumer debt, such as home/car mortgages or credit cards.  It also doesn't work for most established companies, as they're usually unwilling to trade stock for cash, the exception being that they may use that stock as the basis for a Murabaha contract.

2) Murabaha.  Murabaha is when you and the bank make a contract for you to sell something trivial to the bank and then buy it back in the future for more money.  IE, the bank pays you $100 for a loaf of bread.  You agree that in 1 week you will buy the bread back for $120, and to pay the bank you make 12 monthly payments of $10 each.  The value of the bread isn't anywhere near $100 or $120, even though you have agreed that it is.

This is how the overwhelming majority of Islamic banking transactions are structured, and is functionally identical to making a traditional loan.  The only difference is that the terms of the loan have been phrased to eliminate any mention of the word interest and an Islamic cleric has issued a fatwa legitimizing the loan.