Home Finance - Frequently Asked Questions

You are advised to read through this section as you may find the answers to some of the most frequently asked questions.

Q. Should I obtain advice from anyone else, regarding Shariah Compliance, before proceeding?

A. We will provide you with the information required (including the fatwa, when requested, from our Shariah Supervisory Committee) but ultimately the decision to apply is your choice. You may decide to consult your local Imam or Mufti directly but please remember that they are probably not Independent Financial Advisors ("IFAs") and may not be qualified to give you financial advice.

Q. What are the steps involved?

A. You need to complete the application form and return it to ABC International Bank plc.

Your application will be considered based on the Bank’s criteria and certain information requested from you. Once the Bank is satisfied that you meet its criteria, the valuation report is satisfactory and you have provided the necessary information, you will receive an offer (the "Offer Letter"). The Offer Letter will set out the terms and conditions upon which the offer is based and you will also be sent a draft copy of the Diminishing Ownership Agreement, Lease Agreement and the Legal Charge at the same time. You should go through each of these documents with your solicitor before you decide to proceed.

On completion:

The Bank will pay its contribution towards the purchase of the property through your solicitor. You will pay the difference between this amount and the actual purchase price of the property.
If you are switching to the Bank from a conventional mortgage or from another Islamic form of finance, the Bank will pay the amount it is prepared to finance to the Bank’s solicitor. Any difference between this amount and what is owed on your existing mortgage(s) must be paid by you. The Bank will arrange to collect this difference from you before completion. The Bank’s solicitor will then pay the total amount to your existing financier to fully repay the sum due.
The Bank will be registered at HM Land Registry as the legal owner of the property.
You will lease the property from the Bank for an agreed number of years and you will be the registered owner of the leasehold title at HM Land Registry.
The first priority Legal Charge you grant to the Bank will be registered at HM Land Registry against your leasehold title.
You will pay monthly instalments (Acquisition Payments) towards the purchase of the Bank’s share of the property (Acquisition Cost) as well as Rent for the duration of the payment term; and
Once you have paid the outstanding Acquisition Cost and Rent due, the property will be transferred into your name and your solicitor can then arrange for the record at HM Land Registry to be amended to remove the Bank as registered owner and replace you as the registered legal owner of the property instead. The Legal Charge will be removed.

Q. What contracts do I need to sign?

A. You will have to enter into legal agreements with the Bank. Below we describe these agreements although you must take your own independent legal advice on them.

There are principally four documents (‘the Legal Documents’) that you will be sent when your application has been approved:

The Offer Letter - this will contain the Bank’s offer to finance and will detail the transaction and the sums involved along with the steps that will be taken by the Bank to purchase your chosen property.
The Diminishing Ownership Agreement - in this agreement, the Bank will agree to sell the property to you over the Payment Term (i.e. the number of years and months over which you wish to acquire the Bank’s share of the property). Every month you will agree to pay an Acquistion Payment towards the Acquisition Cost of the property (i.e. the price we paid to purchase the property less your share). Once the Acquisition Cost and all Rent has been paid in full, the Bank will transfer the property to you and you become the registered owner.
The Lease Agreement - in this agreement, the Bank will agree to lease the property to you and in return you will agree to pay monthly Rent. Rent will be determined based on a number of factors, including the amount outstanding under the Diminishing Ownership Agreement and the rental rate in the transaction.
The Legal Charge - as security for your payment obligations under the Diminishing Ownership Agreement and the Lease Agreement, you will grant the Bank a first priority legal charge over your interests in the Diminishing Ownership Agreement and the Lease Agreement.

Q. Can I make additional payments to the Bank?

A. You can make additional Acquisition Payments but these can only be made in the month prior to each Rent Review. Please check the Diminishing Ownership Agreement for full terms and conditions.

Q. Can I refinance?

A. You can switch from an existing conventional mortgage or from another Islamic Home Finance provider. Like a purchase, you will have to go through the legal process of the Bank buying the property from you or from your bank. However, please note that the Shariah Supervisory Committee have ruled that where you are already the owner or part owner of the property, to ensure that this is not an artificial transaction, and in order that both the financier and the customer are exposed to some of the risks of property ownership, the customer must not complete the purchase of the financier’s shares for a minimum period of 1 year. This does not apply where the property is being purchased from a 3rd party. Due to constraints under the law of the United Kingdom, this requirement has not been incorporated in the Agreements so it is left as a matter of conscience to the individual customer to ensure that they follow this guidance.

Q. What happens if I lose my job or am unable to pay the Bank for any reason?

A. If your financial circumstances change for any reason and you encounter difficulty in meeting your monthly payment, it is vital that you contact the Bank as soon as possible. What action the Bank takes is dependent on the circumstances. However, the Bank promises to act fairly and reasonably at all times.

Q. What happens if I die, as the property is in the Bank’s name?

A. This will be handled sensitively and respectfully. It may be possible to transfer payment obligations to other individuals as long as they are able to demonstrate their ability to meet the payment obligations. At present, we do not offer life cover as we are not satisfied that any Shariah compliant alternatives to life assurance exist. However, if this is a concern, you should consult with an Independent Financial Advisor.

Q. How does the Bank own the property that I have chosen?

A. The Offer Letter will outline how the Bank will purchase the property. It will be a requirement under the Offer Letter that you instruct your solicitor to include a special condition in the purchase contract (i.e. the contract you will enter into with the seller of the property) conferring the ability to transfer the property to the Bank by way of a sub-sale. The reason for this requirement is that the Bank will need to complete the purchase of the property rather than you, although you will carry on the negotiations with the seller’s solicitor in the usual way. On completion, the Bank will pay its contribution to the purchase price of the property (the Acquisition Cost) to the seller and you will pay your Share (being the difference between the Acquisition Cost and the purchase price), and legal title to the property will transfer to the Bank.

Q. Why does the Bank hold legal title? If I am buying the property why am I not the legal owner?

A. It is a requirement under the Shariah when leasing property that the financial provider holds legal title. In this instance the property will be registered in the name of the Bank. It is true that you are purchasing the property but the Bank is assisting you by agreeing to finance an element of the purchase price. In an ordinary loan, the mortgage provider would advance you money to assist in the purchase of the property. With such a loan you would be the legal owner but you would grant a mortgage to the mortgage provider to secure your repayment obligations. In our case there is no loan, rather the property is leased to you so you cannot become the legal owner immediately. You do however become the legal owner once you have purchased the Bank’s share (i.e. once the balance of the Acquisition Cost has been paid) and the property has been transferred into your name in accordance with the Legal Documents.

Q. If the Bank is the legal owner does that mean that it will benefit from any increase in the value of the property?

A. Whilst the Bank is the legal owner, it will not benefit from any increase in the value of the property. The Bank will receive the balance of the Acquisition Cost due under the Diminishing Ownership Agreement paid in purchasing the property as well as the Rent due under the Lease Agreement. Any appreciation or depreciation in value of the property will be passed on to you on completion of the sale of the property under the Diminishing Ownership Agreement.

Q. You state that the Rent is calculated on the Acquisition Cost outstanding under the Diminishing Ownership Agreement. The example is calculated at the rate of 5% pa. This seems like an interest rate. Is it permissible under the Shariah to determine Rent in this way?

A. The comparison between the price of an Islamic financial product and a conventional (that is, non-Islamic) product is known as "benchmarking". It is important to understand that the process of benchmarking, which involves referring to a product that might use an interest rate (such as LIBOR plus a further profit margin) when determining the level of Rent charged, is not the same as charging interest under a loan. Scholars have permitted Islamic finance providers to refer to an interest rate benchmark for determining Rent provided that the benchmark is well known to everyone so that no dispute over the amount of Rent can arise in the future. If the characteristics of Ijara are present (e.g. the Bank owns the property and leases it to the customer) it does not matter that the Rent is calculated in this way.

*LIBOR - means the London Inter-bank Offered Rate, and is used as a benchmark for the pricing of rent.

LIBOR rates are set daily and can be easily obtained in financial newspapers or on the internet.

Q. If I make payments late, why do I have to pay additional amounts? Surely this additional payment is the riba that the Holy Qur’an has forbidden?

A. There may be times when some customers make their payments late and as a financier there will be additional administrative costs as a result of such late payments and these costs can be recovered. The additional payment is not therefore a profit but a reimbursement of costs and expenses. The Shariah Supervisory Committee has agreed that this is acceptable.

Q. I understand the Bank will review the Rent. I have two questions concerning this:
(a) Why is there a review of the Rent?
(b) What happens if the Rent increases too much and what does this mean for me?

(a) Providing a product that has variable Rent is important to both our customers and the Bank. It is important that the Rent payable remains competitive and provides a rate of return that is comparable with the profit that is made by other providers when advancing conventional non-Islamic loans. At the same time, our customers want the flexibility of knowing that if the rates that are used for benchmarking purposes go up or down, their Rent will accordingly be adjusted. There is a further reason why the Bank adjusts the Rent. Some of our customers may wish to make additional Acquisition Payments, which can be made immediately prior to the Rent Review. By periodically adjusting the Rent, the additional Acquisition Payments are taken into consideration when assessing what the new Rent figure should be on each Rent Review Date.

(b) You have the right under the Diminishing Ownership Agreement to purchase the property from the Bank by paying the remaining balance of the Bank’s share (i.e. the remaining Acquisition Cost) in accordance with the Diminishing Ownership Agreement. You should refer to the Lease Agreement and the Diminishing Ownership Agreement for further information on your rights concerning this.

Q. If I want to sell the property in the future, can I do so?

A. In the Diminishing Ownership Agreement you have the right to request the Bank to transfer the property either to yourself or to a third party. You will be required to pay the remaining balance of the Acquisition Cost due to the Bank under the Diminishing Ownership Agreement or, if you are selling the property to a third party, you must ensure that the selling price is sufficient for the Bank to receive the remainder of the Acquisition Cost from the sale proceeds or from any other legal sources. In either case the property will not be transferred unless all sums due to the Bank are paid. In the case of a sale to a third party, the Bank has the obligation to execute a Transfer only. The Bank will not enter into any contract with that third party.

Q. How will the property be transferred to me once the Acquisition Cost has been paid?

A. The Diminishing Ownership Agreement provides that Completion of the sale of the property to you will take place following receipt of your final payment.

Q. Is Islamic Home Finance regulated by the FSA?

A. With effect from 6th April 2007 some Islamic Home Finance products are regulated by the Financial Services Authority (FSA). Islamic Home Finance products are referred to as Home Purchase Plans (HPP’s). HPP products are regulated by the FSA to establish standards and procedures to treat customers fairly and seek to ensure that all information given is accurate, fair and not misleading. This will give customers a degree of protection and confidence to enter into HPP agreements having been made fully aware of the key facts and risks involved in the proposed transaction.

For further information concerning HPP regulation, please refer to the FSA website (www.fsa.gov.uk)