What is Islamic, Amanah & Shariah compliant finance?
Because it is forbidden under Islamic and Shariah law to pay or receive interest, the process of re-mortgaging, re-financing or purchasing a property requires an alternative approach for people of the Islamic faith.
It is also important that banks involved in Islamic, Amanah and Shariah-compliant finance do not practice impermissible activities, such as providing finance to companies that produce or sell alcohol, gambling products, or non-halal meat.
Shariah conveyancing law is a quickly evolving legal area, and there are more and more banks now offering Shariah-compliant Islamic mortgages, which are carefully structured to ensure the bank or institution lending you the money will not profit from any interest.
Islamic mortgages can work in a number of different ways to ensure that interest is not paid or received by the lender. Islamic mortgage types include:
- Murabaha
This is a non-interest bearing loan, whereby there is an agreement between the buyer and the seller that an intermediary will retain the ownership of the property until the loan is fully paid. This is similar to a rent-to-own agreement. - Musharakah
Under a Musharakah agreement, each party involved in the transaction shares in the profits and the risks. The bank or institution financing the purchase, re-mortgage or re-finance will stand to gain from actual profits earned, rather than interest, but they will also stand to share in any losses made on the property. - Ijara
Mortgages based on the Ijara principle are similar to lease-to-own mortgages, in which you find a house to purchase, agree a price with the seller, and then agree to pay back the purchase price to the lender in monthly instalments – with the rent providing a profit to the lender, rather than interest.
While Islamic mortgages are designed to avoid the issue of interest being paid or received, they are not a shortcut to free lending from banks or financial institutions – there will always be something for the lender to gain by offering Islamic, Amanah and Shariah-compliant finance.
