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Saturday, 25 August 2007

Using an Islamic mortgage - murabaha or Ijara

It is against Islamic law to pay or receive interest, or riba, which has made it difficult for Muslims living in Britain to buy a house. The Koran says: “O you who believe! Fear Allah and give up what remains of your demand for interest if you are indeed a believer.” The holy law of Islam that govern all aspects of a Muslim’s life, including banking is called Shariah law. When it comes to home buying it has only been the very rich who have been able to afford to buy a home outright. Fortunately however many banks and building societies are starting to recognise this as a problem and are offering an alternative. There is already a large market in the Middle East, and Islamic finance in both the residential and commercial sectors for the UK’s Muslim community. It came under FSA regulations in April 2006. There are two options available that correspond with Muslim law. The Murabaha Mortgage: This is really only an option for individuals/families who can draw on a fair amount of capital, because it is a condition of this Mortgage package that you are expected to pay around 20% of your home’s value on the day of purchase. From that day forth the house will be registered as your own. You are allowed to pay off any debt that is outstanding on your home at any point. This package offers a fixed repayment period that you agree with your lender, and the monthly repayment amount is fixed for the term of your mortgage. A Murabaha Mortgage works like this: when you find the house that you would like to buy, you arrange a sale price with the vendor as normal; however, the bank pays the purchase price, then sells the house to you at a higher price straight away (the higher price is determined by the original price of the property, and the repayment period that you will have agreed with the lender), minus the percentage you paid as deposit. The Ijara Mortgage: This is the slightly more popular mortgage of the two, as the requirement for a large amount of capital behind you to set up this mortgage is reduced, and it is also slightly more flexible than the Murabaha. This type of mortgage has the extra benefit in that it can even be taken out to replace an existing interest mortgage. The amount you pay each month is usually fixed every year. You are allowed to pay off the outstanding balance at any time (usually) without incurring any penalties. An Ijara Mortgage works like this: as with the Murabaha mortgage, you find a property that you would like to buy, and agree a purchase price with the vendor. The difference with the Ijara is that your lender will then purchase, and gain ownership of the property, and you will enter into a lease agreement with the lender. Each month you will be expected to pay rent to your lender and a contribution towards the purchase of your property. So, to summarise: The Murabaha Mortgage is deferred sale finance. The Ijara Mortgage is lease to own. It is interesting to ask whether Islamic mortgages have relevance beyond the UK’s Muslim community (1.6m at the 2001 Census). Amjid Ali, head of UK Amanah, the Shariah department at HSBC, says: “From our understanding of the Asian market, families like staying together and with our contracts you can have up to six people’s income taken into consideration. Although that may not apply to the wider market, if you look at the graduate schemes, as long as the applicants are living in that property together, we can support an application of up to six people’s income. We’re getting more enquiries about Islamic finance products. It’s become more appealing to the wider public due to its ethical nature.” Most Islamic home purchases are still geared towards professionals, and there are still some barriers preventing certain sections of the market, creating a niche within a niche. Work is progressing to make Islamic mortgages available to everyone. Housing associations cannot currently take part in shared ownership schemes with Islamic finance, but the government has been asked to review the scheme. Others say there has been no interest in Islamic financing beyond the Islamic market. There can be no additional advance after the original one, so Islamic mortgages cannot be used for additional financing of say home improvements. The only way to achieve that would be to move from one lender to another. Some non-Muslims like the idea of the flexibility of the Islamic system as lump sums can be paid off. However, even some Muslims are confused by the compliance aspects with Shariah law, so wider misunderstanding is not surprising. The market is young, and a lot of education and understanding is still needed. - (TTS, 24 Aug 07)

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