3 Best Islamic home finance strategies explained
Islamic home finance was created to help the followers of Islam acquire a property. This was done because Muslims follow what is called “Sharia law”. Under Sharia law there’s a concept called Riba in Arabic, which forbids the payment and receipt of interest, as Muslims believe that one shouldn’t benefit at the expense of another. Therefore they cannot use traditional mortgages to purchase their homes as the provider which they get their mortgage from may be investing in unethical investments and as mentioned previously the payment of interest is also forbidden. Thus home purchase plans were created to help Muslims buy their properties, ethically. There are three main ways they can do so: Murabaha, Diminishing Musharaka and Ijara and I’ll explain each in more detail below.
Murabaha
The maximum repayment term with this method is 15 years, and deposits of usually 20% are required. Ownership is passed on to the customer when the purchase is made, so the property is registered in their name from the beginning of the agreement rather than this happening at the end. With Murabaha the mortgage provider buys the property at a price agreed by the customer and than the provider sells the property to the customer at a higher price, the higher price representing the profit element to the provider which is paid back in instalments by the customer. This method is often also called cost plus financing.
Diminishing Musharaka
This is quite similar to the Ijara method of home finance but ownership of the property is transferred gradually as the customer makes it’s instalments.
Ijara
The maximum repayment term is 25 years, with deposits of 20% required. This is also known as the lease to own method and the provider buys the customers chosen property and sells it to the customer at the same price. The customer makes monthly instalments which are a combination of repayment of the mortgage and rent for the lease. The provider making its profits off of the rent.
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