Home Financing Through Sharia Banking: What You Need to Know
Under the Islamic law called sharia, all Muslims are clearly prohibited from enjoying money from riba or surplus value without counterpart. In simple words, one is not allowed to pay or receive money from interest, which in sharia is really considered usury no matter what the rate is. Encouraged by this principle, Islamic banking has been growing rapidly in recent years. Each one of these banking institutions offers similar services such as Islamic-based profit sharing (mudharaba), safekeeping (wadiah), cost plus (murabaha), leasing (ijara), and joint venture (musharaka).
In countries where Sharia banking has been introduced, Islamic mortgages do not only attract Muslim customers, but also the non-Muslims alike. Some of these people enjoy the benefits of not paying interest for financing their home, while some others are interested in the ethics of the system itself. The murabaha, ijara and musharaka are three of the most common approaches to Sharia-compliant mortgages.
Murabaha or deferred sales financing is especially aimed at people who have capital in the beginning. In this method, the buyer is asked to pay a percentage of the property upfront. The amount of the initial payment may vary, but it is commonly around 20% of the entire price of the property. As you have paid the initial payment, you will automatically be registered as the owner of the property. Depending on the agreement between you and your lender, you can decide the amount and period of repayment. The repayment will be fixed for the term of your mortgage. Maximum repayment terms in murabaha are 15 years, and, if you can afford it, you can pay the remaining for full balance without any penalty even though it is well before the maturity of the agreement.
On the other hand, ijara or leasing method is a more popular way for Islamic home financing. Unlike the mudharaba, ijara does not require you to deposit any initial payment for the property. Ijara is more flexible in terms of payment. In ijara, the property will not immediately be registered as your own. Instead, you will be listed as the renter of the property. Additionally, just like a renter, you will be required to pay monthly rent to the bank, whose amount has been agreed upon between you and your lender. At the end of the mortgage term, or when you have fully paid for the property, the ownership deed will be finally transferred to you.
Musharaka works rather similarly to ijara. In musharaka, you get to choose your desired property and agree to pay certain amount of the purchase price. In musharaka, you will need an initial payment. Differing from the murabaha, which places the property directly under your ownership, the musharaka regulations will register you as the joint owner of the property. This means that you have shared ownership with the lender until you fully pay the entire purchase price, with either monthly payment or a full payment.
If you already have a regular mortgage but want to change it to an Islamic mortgage, you can do it easily. The bank will purchase your property at its proper market value, and then you will have to buy back the property at the same price. As the bank returns the money from your previous regular mortgage, you will make a new (and fair) Islamic mortgage to the bank.