alburaq Shariah compliant home finance is based on the accepted and widely used Islamic financing principles of Ijara and Musharaka. We believe that using these two methods of Islamic finance offers the best solution for Shariah compliant home finance in the UK today.
Described simply, both you and the Bank will each contribute towards the purchase of the home so that we both have a financial share in the property.
Over an agreed period, you will make monthly purchase instalments through which the Bank will sell its share to you. With each payment instalment, the Bank’s share in the property diminishes while your share correspondingly increases. While the purchase instalments are being made, the Bank will charge you a rent for the use of its share of the property, the rent being calculated according to the respective shares owned.
Many see this as little different to a conventional mortgage, because under both methods monthly payments are made which may be similar in amount. However, unlike a conventional mortgage, where money is lent to help with the purchase of a property, the Bank instead makes its profit through the property’s physical use via your occupation as a tenant. This is one of the fundamentals of Islamic finance whereby you can charge for the use of something physical, like a property, but you cannot charge for the use of money, because this is interest. The relationship between you and the Bank is also quite different. Two of the major differences are highlighted below.
- As owner of the property, the Bank faces risks associated with property ownership. This is a situation that does not exist under a conventional mortgage, where the bank never actually owns the property.
- In a conventional mortgage, the customer is the borrower. However, in an Ijara/Musharaka structure, the customer is the Bank’s tenant. This relationship between the Bank and its customer presents the Bank with different risks and requires different remedies to problems that might occur.
It is crucial differences like these that allow Shariah Scholars to approve a product and that make alburaq Shariah compliant home finance an acceptable way for Muslims to refinance, or finance the purchase of their homes.
Buildings Insurance
Protecting the buildings
As finance is based on Ijara and Musharaka concepts, it is the responsibility of both parties to insure the portion of the property in which they have a legal or beneficial interest. This is an important requirement of the Shariah Supervisory Committee as it is consistent with the concept of risk sharing. In order to make this work in practical terms the Shariah Supervisory Committee have agreed that either the Bank or the client may insure the property in its entirety.
As the property is being purchased for your benefit and you will be the occupier and the main tenant (unless the transaction is Buy To Let) then the Shariah Supervisory Committee have stated that the cost of insurance should be paid by you.
You are free to obtain the best deal for you, however the Bank’s interest in the property must be noted on the insurance policy.
