Mortgages, Loans, Credit Cards. Islamic Finance
The UK’s 2 million Muslims face an ethical problem when organising their money. Conventional mortgages, loans, credit cards all involve the payment of interest and interest, or “riba” as it is called under Islamic law, is forbidden by the Koran. (See below for a precise definition of “riba” and other Islamic finance words.)
British banks and building societies are increasingly catering for the specialist needs of Muslims through a series of alternative arrangements that adheres to the scriptures in the Koran. Here are just two of them:
Ijara with diminishing Musharaka
This is an Islamic home finance alternative to a mortgage that has been adopted by several banks and building societies. Musharaka basically means partnership. Under this financial concept, the financial institution buys the house and becomes its legal owner. Then over a set period, say 25 years, a monthly payment is made. Each payment includes a charge for rent plus a charge that buys a small proportion of the house itself. It’s a sort of shared equity plan with the proportion of the house being owned by the contract holder, steadily increasing as payments are made. On the final payment the house is owned outright.
Ijara
Here the financial institution buys something that you want, for example a car. The institution then allows you to use it for an agreed period in return for a monthly payment that covers the cost of the institution’s capital. In practice it’s a form of leasing
So where can you arrange Islamic finance? Here are three suggestions:
HSBC is developing a special range of Islamic products under the Amanah brand. These products include home finance plans, commercial finance, home insurance, and various current accounts and pensions. Hussam Sultan, Amanah’s product manager says, ”As a bank, we are not here to moralise or tell our customers that Amanah finance is the way to please Allah. We’re just here to provide them with a choice”.
Over the last year Lloyds TSB has been introducing Islamic products to its branches. 33 branches now sell Islamic products. They say, “It is important for our customers to see that we are following the right procedures. We have a panel of four Islamic scholars who over-see the products. They offer guidance on Islamic law and audit the products”.
The Islamic Bank of Britain has 3 branches in London, 2 in Birmingham, 1 in Manchester and Leicester. They are the only British bank specifically catering for Muslim customers and claim to be totally halal. All their products are approved by their Sharia’a Supervisory Committee – Muslim scholars who are expert in all matters of Islamic finance.
Glossary of various Islamic words used in finance
amanah: Trust, with associated meanings faithfulness, trustworthiness and honesty. As a central secondary meaning, the term also describes a transaction where one party keeps another’s funds or property in trust. This is in fact the most widely used and understood application of the term. It has a long history of use in Islamic commercial law. Amanah can also be used to describe different commercial or financial activities such as deposit taking, custody or goods on consignment.
arbun: Means a form of down payment. A non-refundable deposit paid by the buyer to a seller upon concluding a sale contract, with the provision that the contract will be completed during a prescribed period.
gharar: Means uncertainty. One of three fundamental prohibitions in Islamic finance (the other two being riba and maysir), Gharar is a sophisticated concept that covers certain types of uncertainty or contingency in a contract. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as speculation, short selling, and derivatives.
Islamic banking/ Islamic finance/ Islamic financial services: Means financial services that meet the requirements of Islamic law or Shariah. While designed to meet the specific religious requirements of Muslim customers, Islamic banking is not restricted to Muslims: both the service provider and the customer can be non-Muslim as well as Muslim.
ijara: Means an Islamic leasing agreement. Ijarah allows the bank to earn profits by charging rentals on the asset leased to the customer instead of lending money and earning interest. The concept of ijarah is extended to a hire and purchase agreement by Ijarah wa iqtinah.
maysir: Means gambling. Another of three fundamental prohibitions in Islamic finance (the other two being gharar and riba ). The maysir prohibition is often used as the basis for criticism of conventional financial practices such as speculation, conventional insurance and derivatives.
mudarabah: A Mudarabah is an Investment partnership, where capital is provided to one party/entrepreneur (the Mudarib) by an investor (the Rab ul Mal) in order to undertake a business or investment activity. While profits are shared on pre-agreed proportions, any loss of investment is born totally by the investor and the mudarib loses the expected share of income.
mudarib: The mudarib is the investment manager or entrepreneur in a mudarabah (see above), who invests the investor’s money in a project or portfolio in exchange for a share of the profits. For example, a mudarabah is essentially similar to a diversified pool of assets held in a Discretionary Managed Asset Portfolio.
murabaha: means purchase and resale. Rather than lending money, the capital provider purchases the desired asset or commodity (for which a loan would otherwise have been taken out) from a third party and resells it at a higher predetermined price to the capital user. By paying this higher price by instalments, the capital user effectively obtains credit without paying interest. (Also see tawarruq.)
musharaka: Means profit and loss sharing. It’s a partnership where profits are shared in pre-agreed proportions whereas the losses are shared in proportion to each partners capital or investment. In a Musharakah, all the partners to the business undertaking contribute funds and have the right, but not the obligation, to exercise executive powers in that undertaking. It is similar to a conventional partnership and the holding of voting stock in a limited company. Musharakah is widely regarded as the purest form of Islamic financing.
riba: Means interest. The legal concept extends beyond interest, but in simple terms riba covers any return of money on money. It doesn’t matter whether the interest is fixed or floating, compounded or simple, and at what the rate is. Under The Islamic tradition Riba is strictly prohibited.
Shariah: Islamic law as disclosed in the Quran and through the example of Prophet Muhammad (PBUH). A Shariah compliant product meets all requirements of Islamic law. A Shariah board is the committee of Islamic scholars available to an Islamic organisation for guidance and supervision for the development of Shariah compliant products.
Shariah advisor: Means an independent professional, usually a classically trained Islamic legal scholar, who advises an Islamic financial organisation on the compliance of its products and services with Islamic law, the Shariah. While some Islamic organisations consult individual Shariah advisors, most establish a committee of Shariah advisors (often known as a Shariah committee or Shariah board).
Shariah compliant: Means an act or activity that observes the requirements of the Shariah, or Islamic law. The term is often used in the Islamic banking industry as a synonym for “Islamic”- for example, Shariah compliant investment or Shariah compliant financing.
sukuk: Similar characteristics to a conventional bond. The difference is that that they are asset backed and a sukuk represents a proportionate beneficial ownership in the underlying asset. The asset is then leased to the client to yield the return on the sukuk.
takaful: Means Islamic insurance. Takaful schemes are designed to avoid the elements of conventional insurance (i.e. interest and gambling) that are so problematic for Muslims, by structuring the arrangement as a charitable collective pool of funds based on the idea of mutual assistance.
tawarruq: This is the reverse murabahah. When used in personal financing, a customer with a genuine need buys something on credit from the bank on a deferred payment basis. That customer then immediately resells it for cash to a third party. The customer thereby obtains cash without taking an interest-based loan.
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