Mortgages And Loans. Islamic Finance Avoids Interest.
Below is a MRR and PLR article in category Finance -> subcategory Mortgage.
Mortgages and Loans: How Islamic Finance Avoids Interest
Introduction
For the two million Muslims in the UK, obtaining a mortgage or loan presents an ethical challenge. Conventional financial products involve interest payments, known as riba in Islamic law, which are prohibited by the Quran. However, British financial institutions are increasingly offering alternatives that align with Islamic principles. Here are two key options:
Ijara with Diminishing Musharaka: An Alternative to Traditional Mortgages
Ijara with diminishing Musharaka provides a Sharia-compliant alternative to conventional mortgages. Here's how it works:
- Partnership Model: The bank and the buyer enter into a partnership where the bank initially buys the property and owns it.
- Joint Ownership: Over an agreed period, often 25 years, the buyer makes monthly payments that include rent and an incremental purchase of the property.
- Full Ownership: Eventually, the buyer owns the property entirely after all payments are made.
Ijara: A Leasing Alternative
Ijara essentially functions as a leasing agreement:
- Asset Purchase: The bank purchases an asset (e.g., a car) that the customer wants.
- Lease Agreement: The customer makes monthly payments covering the asset's cost, effectively leasing it for a set period.
Availability of Islamic Finance in the UK
Islamic finance is gaining traction in the UK. Here are some options:
1. Lloyds TSB: With Islamic products in 33 branches, Lloyds TSB ensures adherence to Islamic law, guided by a panel of scholars.
2. HSBC Amanah: Offers a range of Islamic products, including home finance, under the Amanah brand. Their approach emphasizes customer choice without moral judgment.
3. Islamic Bank of Britain: With branches in cities like London and Birmingham, this bank exclusively serves Muslim customers, ensuring all products are Sharia-compliant.
Key Islamic Finance Terms
Understanding Islamic finance involves some specific terminology:
- Amanah: Trustworthiness in financial dealings, often related to holding funds or property in trust.
- Musharaka: Profit and loss sharing in business partnerships.
- Murabaha: Purchase and resale model, offering credit without interest.
- Sukuk: Islamic bonds backed by assets, offering a proportionate ownership.
- Takaful: Cooperative Islamic insurance, avoiding traditional insurance pitfalls like interest and gambling.
Conclusion
UK Muslims now have options that align with their faith when seeking financial products. By embracing Islamic finance principles, banks and financial institutions provide ethical alternatives to traditional interest-based products, ensuring compliance with Sharia law.
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