Mortgages and Loans. No interest payments for those of Muslim faith

With over two million Muslims in the UK, the question of how to borrow money for a mortgage is one that faces many. Mortgages and loans operated in the UK all work using a repayment system based on interest, and those of the Muslim faith are forbidden to pay ‘riba’ (the Islamic term for interest) by the requirements of the Quran. To address the size of the Muslim population in the UK, some lenders have found it necessary to develop specific products that meet Muslims’ needs. Here we have detailed two of the financial products suitable for Muslims.The Islamic alternative to the mortgage - Ijara with diminishing Musharaka This is the main Islamic alternative to a UK mortgage, and UK banks and building societies are increasingly offering this option to Muslim customers. ’Musharaka’ means partnership and the mortgage works by way of a variable shared equity plan. The bank is the legal owner of the property and is its legal owner. For the term of the agreement, 25 years for example, the customer pays a monthly payment which includes a rent payment and a payment that buys a small proportion of the property. The proportion that the buyer owns of the property increases over time as more payments are made. The buyer owns the property in full once the final payment has been made.The Islamic alternative to the loan - IjaraIf a customer wants to buy a car or another big item for which they do not have the money, they can ask the bank to buy the item for them. Then the customer pays the bank back by way of a monthly payment. That payment covers the bank’s costs in buying the item and the bank allows the customer to use the car, for example, so it’s like having a lease. Finance for Muslims is not something that is easily accessible in the UK, but it’s there if you know where to look. Here we have collated three institutions that offer finance to Muslims. 1. Lloyds TSB has introduced financial products aimed at Muslims in 33 branches in the last few years. This is their position on the matter: “It’s important for our customers to see that we are following the right procedures. We have a panel of four Islamic scholars who oversee the products. They offer guidance on Islamic law and audit the products”.2. HSBC has devoted a brand called ‘Amanah’ to service Muslim customers. Included within the range are current accounts and pensions, home finance plans, home insurance and commercial finance opportunities. The product manager for the brand, Hussam Sultan, has stated: “As a bank, we are not here to moralise or tell our customers that Amanah finance is the way to please Allah. We’re just here to provide them with a choice”.3. The Islamic Bank of Britain has seven branches across the UK, covering the main Muslim areas of London, Leicester, Birmingham, and Manchester. The Islamic Bank of Britain is the only British bank that deals specifically with Muslim customers and they are 100 halal in all respects. The Sharia’s Supervisory Committee approves all of their financial products, which consults with specialist expert financial Muslim scholars.We have collated a list of oft-used Islamic finance terms and defined them for you here, for your interest and information. Islamic finance terms - glossaryAmanahQuick definition: trustworthiness, faithfulness and honesty.Amanah is also used to define a situation in which one party is keeping another person’s property in trust. This is the way in which the term is most commonly applied, especially within the confines of Islam commercial law, and the term has a long history of use. The term is also applied when referring to goods on consignment, custody or deposit taking.ArbunQuick definition: down payment. This term describes the deposit that the buyer makes to the seller at the same time as making the agreement to complete payment by a set date. GhararQuick definition: uncertainty. Gharar is a conceptual term that refers to something that is not completely set in stone within a contract. It’s a fundamental disagreement between Islamic and conventional UK law and Islam does not recognise the need for related practices such as speculation, derivatives and short selling contracts.Islamic banking / Islamic financial services / Islamic financeQuick definition: financial services specifically designed to adhere to Islamic law or Shariah. Although these financial services are designed for Muslims, they are not exclusively available to Muslims. Non-muslims can also provide and buy the services. IjaraQuick definition: Islamic leasing agreement.Because Islam forbids the charging of interest, Muslims get an Ijara which enables the bank to seek profit through the leasing of assets (house, car etc) rather than by actually lending money. Ijarah wa iqtinah is an extension of the concept which is a hire purchase agreement.Maysir: Quick definition: gambling. Maysir is forbidden in Islam and as such the concept fundamentally disagrees with some standard financial practices such as speculation, insurance and derivative contracts. MudarabahQuick definition: investment partnership. This is the financial partnership between the investor (Rab ul Mal) and another party (Mudarib). The contract will set out how profits will be shared, and losses are absorbed by the rab ul mal. The mudarib will lose some of the income they were expecting as a result. MudaribQuick definition: investment manager or entrepreneur partaking in a mudarabah. It is the mudarib’s responsibility to ensure that the investor’s money is taken care of and is profitable in its investments. In turn the mudarib gets a share of the profits. The role is very similar to a Discretionary Managed Investment Portfolio that we recognise from conventional practice in the UK. MurabahaQuick definition: purchase and resale. As opposed to lending money, the capital provider purchases the required asset or product (for which a loan would otherwise have been taken out) from a third party. The asset is then resold at a higher price to the capital user. By paying this higher price by instalments, the capital user effectively gets credit without paying interest. (Also see tawarruq the opposite of murabaha.)MusharakaQuick definition: profit and loss sharing. This is considered to be the purest form of Islamic financing, because profits and shared in pre-arranged proportions and losses are shared in proportion to the investment made by each investor. Each partner within the Musharakah contributes capital and can make executive decisions however they are under no obligation to. It’s basically very similar to a partnership which involves owning voting stock in a limited company. RibaQuick definition: interest. This is forbidden by the Quran and it forbids any return of money on money, whatever type of interest it may be. ShariahQuick definition: Islamic lawThis refers to the law set down in the Quran and performed by example by Prophet Muhammad (PBUH). Any product purporting to be Shariah must adhere to Islamic law in all respects and to ensure this, a company will usually appoint a Shariah board which will overlook the development and implementation of all Shariah products to ensure they comply. Shariah adviserQuick definition: person who advises on Islamic financial law. A Shariah adviser is generally a Islamic legal scholar who has been classically trained and has the expertise and knowledge to ensure products comply with Shariah. Some work individually to advise companies but most are employed as part of a Shariah board to ensure full compliance.Shariah compliantQuick definition: observing Islamic lawThe Shariah board ensures that products are Shariah compliant, a term that is also covered by the word ‘Islamic’. Many financial products use the term ‘Shariah compliant’ as a prefix so customers can be totally sure that the product has followed the law to the letter. SukukQuick definition: a conventional bondIn conventional terms they are not quite the same as a bond is asset backed and the term ‘sukuk’ describes the proportionate beneficial ownership in the asset itself. The company leases the asset to the client so they can take the profits arising from the sukuk.Takaful Quick definition: Islamic insuranceBecause the concept of insurance relates to uncertainty, which could then be related to interest and gambling, Takaful takes a different approach. The arrangement can be summed up as a charitable collection of funds based on the idea of mutual assistance.TawarruqQuick definition: the Islamic way of obtaining cashWhen as Islamic customer requires cash, they can use this arrangement to obtain it. It involves buying something on deferred credit and selling the item on to get cash. As a result, cash has been obtained without taking out a loan and paying interest. See murabahah for the opposite - a way to get credit.

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