Answer
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
In this fatwa:
1- The Islamic form of selling, which is allowed, is that the bank buys the property and sells it with a higher price; this is murabahah in Islam.
2- As for loan with increment, it is riba and it is impermissible in Islam.
In his response to your question, Prof. Dr. Monzer Kahf, Professor of Islamic Finance and Economics at Qatar Faculty of Islamic Studies, states:
Islamic banks buy the properties for cash and sell them for a higher price on installments. This is permissible and called murabahah.
The difference between lending and this double sale is that in double sale there is always a property that is exchanged, but in lending there is no such condition. A loan may be used to pay a previous loan. This does not add any value of new utility to the economy.
In sale, there is always an added value, wealth or utility. Loan with increment is haram and called usury (riba) in the Qur’an, while sale is always permissible as long as the item itself is permissible.
Allah Almighty knows best.
Editor’s note: This fatwa is from Ask the Scholar’s archive and was originally published at an earlier date.