Question Summary:
What makes Islamic Finance permissible compared to a normal bank?

Question Detail:

 
What makes Islamic Finance permissible compared to a normal bank?

Answer :

In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
In principle, the main difference between financing offered by conventional banks and Islamic financing is that Islamic financing is always based on illiquid assets, thus resulting in all transactions being backed up by physical assets[1].  On the other hand, conventional banks deal purely in money by offering loans with interest. This factor of interest draws the line between permissibility and impermissibility[2] and provides the core factor separating conventional financial dealings from their Islamic counterparts. To understand this more clearly, consider the following example:
Person A wishes to purchase a house worth $300,000. If he approaches a conventional bank, they will offer him a loan of $300,000 plus interest that must be paid on this loan at regular intervals, otherwise referred to as "mortgage". On the other hand, if Person A were to approach an Islamic institution, they would first purchase his house for $300,000 and then sell it back to him with a profit margin. Similar to a conventional bank loan, this will also be paid back on instalments.
It should be kept in mind that this "profit" is not interest; interest is money charged solely for the service of offering a loan, whereas here the money is gained through selling the property under the ownership of the Islamic financial institution with a profit margin to the customer. In other words, it is simply a sale with a mark-up.
As you can see, in the example of a conventional bank it is simply a loan with interest, whereas in the case of the Islamic loan, it involves physical assets coming under the ownership of the Islamic institution before the purchase and selling of the property to the home buyer
This is only one example of an Islamic financing model used for financing. Many institutions may use other models under the same principles for Islamic financing.
For more examples, you may refer to the following book: Introduction To Islamic Finance by Mufti Muhammad Taqi Uthmani
And Allah Ta’āla Knows Best
Bilal Mohammad
Student Darul Iftaa
USA 
Checked and Approved by,
Mufti Ebrahim Desai.
www.daruliftaa.net