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Shariah Compliant Loans and Mortgages

http://www.auburnmountain.com/FinancialEducation/IslamicFinance.aspx

There are approximately 1.5 billion Muslims worldwide, making Islamic banking one of the fastest growing segments of the financial industry. About half of Islamic borrowers are immigrants and half were born in the United States. They come from a variety of backgrounds: African-American, Arab, Pakistani and Iranian are among the most common. All share a common tongue, Arabic, in religious matters.  It there is any thing that draw consensus in Islam among the Ulema (educated class of Muslim legal scholars) it is the condemnation of Interest. Yet all vibrant and growing economies use interest as a tool to attract money and capital.
Prohibition of RIBA in the Hadith 
Abu Hurayrah narrated that the Prophet (saw) said:  “God would not allow four persons to enter paradise or to taste its blessings:
  • He who drinks wine
  • He who takes RIBA
  • He who usurps an orphan’s property without right
  • He who is undutiful to his parents.”

Riba Is Extracted From Raba
The word Riba is extracted from Raba. The literal meaning of interest or Al-RIBA as it is used in the Arabic language means to excess or increase. In Islamic terminology interest means effortless profit or that profit which comes free from compensation or that extra earning obtained that is free of exchange.

The Quran (Koran)
“That they took usury though they were forbidden and they devoured peoples wealth wrongfully; we have prepared for those amongst them who reject faith a grievous chastisement.”  Surah Al-Nisaa’ Allah states in verse 161.

“That which you give in usury for increase through the property of people will have no increase with Allah: but that which you give for charity seeking the countenance of Allah, it is these who will get a recompense multiplied.”  Surah Al-Room, Allah mentions in verse 39

Sharia
Sharia deals with many aspects of day-to-day life, including politics, economics, banking, business, contracts, family, sexuality, hygiene, and social issues. Sharia is the body of Islamic law which public and private aspects of life are regulated. This is the code of law based on the Koran sometimes called Qur’an. This is the sacred book of the Muslims. Shariah scholars believe Conventional Insurance violates Sharia. The Shariah scholars believe that it is unlawful due to involvement of Riba (interest), Maisir (gambling) and Gharar (uncertainty.
Sharia Terms To Remember: Quick Primer
  • Sharia: Islamic religious law.
  • Halal: Permitted for Muslims under Sharia.
  • Haram: Not permitted for Muslims under Sharia.
  • Riba: Interest. Riba is haram.
  • Ijara wa iqtina: Rent to own, usually of a house

Good News!
The good news is that Muslims can borrow and lend money if they do it in a Shariah Compliant manner.

Wadiah
Wadiah is a system in which a person deposits money into a bank and receives a “gift” from the bank. The bank is the keeper of the funds and will refund the entire amount at the demand of the depositor. The bank rewards the amount of time the depositor keeps the money in the bank with a hibah or gift, which is not guaranteed. The hibah is similar to interest, but lawful according the Islamic law.

Shariah Compliant Home Ownership
Increasingly, the lending institutions in the United States and the Europeans countries are offering Shariah Compliant products for their Muslim customers. They offer Riba free home financing and automobile leasing. This offers a way to avoid any chance of Riba while buying a car or home. Muslims can purchase homes in the United States and European countries within Shariah Compliant Guidelines. Home Financing can be done in one of three ways:
  1. Murabaha
  2. Ijara
  3. Musharaka

Shariah Compliant Home Financing…A Closer Look

Murabaha
Murabaha financing involves a “cost plus sale” of the property to the customer. If you use the Murabaha method, you will:
  • Identify the home you would like us to purchase on your behalf.
  • Negotiate the price and other aspects of the purchase.
  • Make any initial payment of earnest money to reserve the home.

The Bank will buy the property at the closing and assumes the risk of loss. The bank will immediately sells the property to you for a fixed price i.e. the purchase price the Bank paid plus the Bank’s profit. The profit is established in advance and is based on current mortgage market rates.  You then pay this total price to the Bank in an initial down payment and in fixed installments over an agreed-upon period of time. 

All payments are scheduled at the beginning of the transaction and do not change. You gain full ownership of the property at the closing. The payments you make will be identical to a conventional fixed-rate mortgage, although the Murabaha transaction is a distinct legal arrangement that is different than a conventional interest-bearing mortgage. This is the most readily available product, and has few additional costs over those of a conventional mortgage.
 
Ijara
Ijara financing is a “rent to own” sale of the property to the customer.  If you use the Ijara method, you will:
  • Identify the home you would like us to purchase on your behalf.
  • Negotiate the price and other aspects of the purchase. 
  • Make any initial payment of earnest money to reserve the home. 

The Bank purchases the property and places ownership in a holding entity.  You agree to purchase the property over time, at cost.  Title to the property is transferred to you after you pay the full cost of the property over time.  Because you are using property you do not own, you also pay rent.  You may choose the rental adjustment period either daily, monthly, annually every three years or every five years.  This product is very flexible, but is more complex and has some additional costs to establish and maintain the arrangement. The payments you make will be very similar to those that you would make on a conventional adjustable-rate mortgage.  If there is sufficient value in the property, you may also use it to establish a Shariah-compliant line of credit.

Musharaka
Musharaka financing is also a “rent to own” sale of the property to the customer. If you use the Musharaka method, you will:
  • Identify the home you would like us to purchase on your behalf.
  • Negotiate the price and other aspects of the purchase. 
  • Make any initial payment of earnest money to reserve the home. 

The Bank purchases the property and you agree to purchase the property over time, at cost.  A portion of the property ownership is transferred to you with each payment you make.  Because you are using property you do not own, you also pay rent on the financier’s portion of the property.  You may choose the rental adjustment period either daily, monthly, annually every three years or every five years.  As an equity-based product, you and the financier are co-owners and thus share in any profit or loss upon your sale of the property based on your percentage of ownership.  This product is very flexible, but is more complex and has some additional costs to establish and maintain the arrangement. The payments you make will be very similar to those that you would make on a conventional adjustable-rate mortgage.  If there is sufficient value in the property, you may also use it to establish a Shariah-compliant line of credit. 

Resources
  • List of Islamic Banks and Lending Institutions at the Institute of Islamic Banking and Insurance
  • Increasingly, the lending institutions in the United States and the Europeans countries are offering Shariah Compliant products for their Muslim customers. They offer Riba free home financing and automobile leasing. This offers a way to avoid any chance of Riba while buying a car or home. Check with the banks and other lending institutions in your areas or on the Internet. 

 

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