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Islamic Finance & Banking with Hamid Yunis - Finance for House Purchases

Islamic Finance & Banking with Hamid Yunis - Finance for House Purchases

Issue 9 Jan / Feb 2005

Over the past few years the greatest interest shown in the use of Islamic fi nance in the United Kingdom is in relation to the purchase of real estate. This can be split between commercial property acquisition and the developing Islamic home finance/mortgage market.

Whilst the majority of signifi cant transactions have been completed in the commercial arena, I thought it would be helpful to consider, in very basic terms, how Islamic fi nance is now being structured in the home finance market so as to allow the wider population to take advantage.

Conventional banks which have set up Islamic fi nance “windows” and indeed Islamic fi nance Institutions have used the widely used Islamic finance principles of Ijara (lease of an asset for an agreed rental or the transfer of ownership of a service for a specified period upon lawful consideration) and Musharaka (a form of partnership or joint venture between a fi nancier and a trader or entrepreneur whereby each party contributes to the partnership capital in equal or varying degrees to establish a new project or to share in an existing one. Profi t and losses shared on a proportionate basis). 

The basic characteristics include the following, by way of an example:

(i) the Bank contributes to the purchase price, say 85%

(ii) the individual contributes the remainder of the purchase price ie. 15%

(iii) over a period of up to 25 years the individual makes monthly purchase instalments through which the Bank will sell its share of the home to the individual

(iv) with each payment/instalment, the Bank’s share in the property diminishes whilst the individual’s share correspondingly increases

(v) whilst the purchase instalments are being made, the Bank will charge a rent for the individual’s use of the property, the rent being calculated in accordance with the respective shares owned, as they change over time, and

(vi) the Bank makes its profi t through the property’s physical use via its occupation by the individual One of the fundamental requirements of the Shariah is that a person can charge for the use of something physical, like a property, but cannot charge for the use of money because this amounts to usury. The relationship between the individual and the Bank is also different to a conventional loan arrangement in that the Bank retains risks associated with property ownership.

It is a responsibility of both parties to insure their interest in the property. In most circumstances the Bank will take out this insurance completely and the cost of the premium is recovered by charging additional rent for a sum equivalent to the premium paid by the Bank. The use of Islamic Insurance (or takaful) products in this area is still being developed.

There are a number of other factors that will need to be taken into account. In particular, stamp duty land tax is tax payable on all residential purchases where the purchase price is £60,000 or higher. There are certain exemptions, but it is unlikely that the vast majority of transactions will fall into this exemption. Stamp duty laws were recently changed so that those fi nancing property using Islamic fi nance are not unduly penalised, although stamp duty land tax is still a concern.

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