Islamic home finance

Background

The religion of Islam embraces all aspects of a Muslim’s life, including the way finance and business dealings are conducted. One of the most fundamental and most widely understood tenets of the religion is that the payment or receipt of interest is strictly forbidden. This means that conventional mortgage products are unsuitable for muslims. In muslim countries, Islamic banks and religious scholars have developed a number of ways to provide finance and banking facilities which are considered permissible within Islamic law. Two of the most common methods of providing Islamic finance are known by the Arabic words "Ijara" and "Murabaha". Scholars and Islamic banking practitioners consider Ijara and Murabaha to be the most suitable finance methods for the purchase of property in the UK.

Ijara: under the Ijara method, the property is purchased by the financier and sold to the customer for the same sum, with payments spread over an agreed term. The customer also pays the financier rent over the repayment term. The purchase instalments could be compared to capital payments under a conventional loan, while the rent could be compared to interest.

Murabaha: under the Murabaha method, the property is purchased by the financier and then immediately sold onto the customer at a higher price. The higher price is determined by the number of years the financier allows the purchase price to be paid over. The additional sum could be compared to the interest charged on a conventional loan, at a fixed rate, over the entire payment term.