Mufti Ismail Ebrahim Desai, CEO – Global Islamic Financial Services Firm
A few Islamic banks and financial institutions today offer Home Finance Solutions which are Shariah Compliant. Imagine a mortgage lender who allows you to take the full capital appreciation of your home when you sell, but is obliged to share any loss if the property has fallen in value. Such a deal seems too good to be true in the current property market, but it is exactly what a handful of banks specialising in Islamic home loans are offering.
Islamic Home Financing Solutions have been in the mainstream market for some years but it may be difficult and confusing to understand the fundamental elements and concepts underpinning Shariah Home Financing products. There are three models/concepts of Islamic Home Loans: Ijara, which means ‘lease’ in Arabic; Musharaka, which means ‘partnership’; and Murabaha, meaning ‘profit’. Depending on the model, the bank will levy rent or add profit to the amount you pay back instead of charging interest.
Ijara Muntahiyah Bi-Tamleek (Lease terminating with ownership)
The bank purchases the property and leases it out to you. At the end of the term you purchase the property from the bank for a fixed balloon payment. The bank is not obliged to sell the property to you nor are you obliged to purchase the property from the bank.
Musharaka plan (also known as ‘diminishing Musharaka’)
You buy the property jointly with your provider and gradually buy the bank out of it. So if you put down 10 per cent of the purchase price, the bank will buy the remaining 90 per cent. You pay the bank monthly rent on the share you don’t own as well as buying more shares in the property with each monthly payment, with a view to owning the property outright at the end of the term – hence the ‘diminishing’ nature of the partnership. The more shares you own, the less rent you pay to the bank, and the cost of a share in the property is based on the property’s original cost price, not its market value. The client and bank share the costs associated to the property pro-rata.
The bank will buy the property you want, then immediately sell it on to you for a profit. You then pay fixed monthly repayments on the higher price, but with no interest to pay back to the bank. So the bank might buy a property that costs ZAR 900,000 and sell it on to a customer for ZAR 950,000; the customer then pays that sum back over a fixed term. The bank is not obliged to provide a rebate on early settlement. The bank may only provide a rebate on a totally volitional basis.
It is extremely important that the bank and client ensure that all the relevant stages in executing the above contracts are duly followed. Any default in following the proper sequence set out will render the transaction invalid. While many individuals sign up for such home financing products, they must ensure that the terms and conditions, contracts and implementation of such documentation are also Shariah Compliant.
It might be argued that charging rent or making a profit is no different to charging interest, in that ultimately the providers still make money. But remember the Islamic Bank never lends money for a profit as that is interest, however the Islamic Bank purchases the actual home and then either leases, sells or partners with the client. Therefore the bank is legitimately allowed to profiteer on such basis. Instead of making money through interest, Islamic banks will make money through profit or through rent when the bank owns the property as an asset. It is important to remember that Islamic home financing simply offers an alternative financing structure which gives Muslim customers different options to purchase their home in a Shariah Compliant manner. It is not a charitable dispensation to offer 0% financing to Shariah banking customers.
Important Advice when purchasing Shariah Home Financing Products:
- Ensure the terms and conditions are Shariah Compliant
- Never sign one document only and ensure you sign several documents since there are different contracts for the solution
- Ensure the Bank has a Shariah Auditor who audits the back end of the bank for Shariah Compliance
- Do not accept higher pricing and poor services as the norm. Demand better pricing and excellent customer service. Islamic Banks need to be competitive and provide higher service excellence to their customers
- Seek guidance and advice from an external party when you are unsure
- If you cannot procure financing from the bank, you can always contact friend, family and associates to fund the purchase of your home on the basis of Shariah Financing
- Ensure the bank’s treasury department is ring fenced to protect Shariah funds from co-mingling with conventional funds