Introduction to Islamic Mortgages
Gaining some understanding of Muslim religion and culture is helpful when attempting to comprehend the reasons for and mechanics of Islamic mortgages (also known as halal mortgages). Attempting to serve both God and Mammon can cause problems for individuals of many different religious persuasions, but funding the purchase of a property in the UK is particularly challenging for the devout Muslim.
Islamic Mortgage Terminology
In order to understand Islamic mortgages, one first needs to become familiar with some of the basic tenets of Islam, which are usually referred to by their Arabic names:
Islam: the religion of Muslim People, means 'submission' to God (aka Allah);
Shariah: also written as Shar`, Sharia, Shari'ah, Shari'a or Tashri`, is defined by Muslim scholars as God`s law, which has been disseminated via the Qur`an (Koran), including the teachings of the Prophet Mohammed. Shariah is considered by committed Muslims to be unquestionable and unchanging.
Halal: simply means permissible under Shariah law.
Riba: means usury or is sometimes translated simply as interest; charging interest is considered to be taking excess payment for goods or services and is forbidden by Shariah law, whereas other commercial activities and trading involving money are permitted;
Ijara: a form of leasing whereby the property owner transfers the 'usufruct' (the right to benefit from the use the property) to a person in exchange for an agreed rent; the rental amount and the length of the lease are agreed in advance;
Ijara-wa-iktana: a type of ijara leasing, in some ways similar to hire purchase, where the lessee agrees in advance to purchase the property at the end of the lease; usually the lease payments will include a contribution that goes towards paying off capital so that the final payment will be relatively small;
Musharaka: means partnership, similar to ijara leasing, but including shared ownership of the property between the lessor and the lessee; the proportion owned by the lessee increases as time passes;
Murabaha: also known as murabha, a contract where a financial institution acquires an asset and then resells it to a client at a higher price (effectively cost price plus a margin to give a return on investment), which the client repays over an agreed term; the mechanics of the contract are similar to a mainstream ¡¥interest-free' credit deal;
Mudaraba: also known as qirad or muqaradah, is a contract where one party (usually a financial institution) makes capital available to another party who provides expertise for a business transaction; any profits generated are shared between the parties on a basis agreed when the contract is initiated; any losses are normally borne by the capital provider;
A basic understanding of some Islamic concepts is useful when trying to understand Islamic mortgages;
when discussing Islamic mortgages, Arabic terms are often used.