Islamic Principles
The term Sharia'a refers to Islamic law as revealed in the Qur'an and through the example of the Prophet Muhammad (peace be upon him).
The authority of Sharia'a is drawn first and foremost from the specific guidance laid down in the Qur'an.
The second major source is the Sunnah, which translates as the Way and refers to the way in which the Prophet Muhammad (peace be upon him) lived his life. This is based on Ahadith, which is a collection of everything that Prophet Muhammad (peace be upon him) said, did, or approved of.
Another important source is Qiyas, which involves the interpretation and analysis of existing law to suit modern-day situations.
The principles of Islamic finance are as old as Islam itself. The Sharia’a Supervisory Committee are experts in the interpretation of Islamic law and its application in modern day financial institutions.
Islamic teaching does not allow a fixed return on capital, as charging and receiving interest (riba) is forbidden.
Murabaha
This is only really an option for individuals/families who have a fair amount of capital behind them, because it is a condition of this Halal Mortgage package that you are expected to pay around 20% of your home’s value, on the day of purchase.
However from that day the house will be registered as your own.
You may pay off any debt that is outstanding on your home at any point.
This Halal Mortgage package offers a fixed repayment period that is agreed between you and your lender, any a monthly repayment amount that is fixed for the term of your mortgage.
So how does the Murabaha Mortgage work?
When you find the house that you wish to buy, you arrange a sale price with the vendor as normal, however the bank pays the purchase price, then immediately sells the house to you at a higher price (the higher price is determined by the original price of the property, and the repayment period that you will have agreed with the lender), minus the percentage you pay as deposit.
Ijara
This is a slightly more popular choice of Halal Mortgage, as you do not need a large amount
of capital behind you to set up this mortgage, it is also slightly more flexible
than its counterpart. An extra benefit to this type of mortgage is that it can even
be taken out to replace an existing interest mortgage. The amount you pay each month
is usually fixed yearly. The outstanding balance can be paid off at any time (usually)
without incurring any penalties.
So how does the Ijara Mortgage work?
As with the Murabaha mortgage, you find a property that you wish to buy, and agree
a purchase price with the vendor, the difference is that; your lender will then
purchase, and gain ownership of the property. You will enter into a lease agreement
with the lender. Each month you will be expected to pay rent to your lender and
a contribution towards the purchase of your property.
Mudaraba
Mudaraba refers to an investment on your behalf by a more skilled person. It takes the form of a contract between two parties, one who provides the funds and the
other who provides the expertise and who agrees to the division of any profits made in advance.
In other words, the financail institution will make Sharia’a compliant investments and share the profits with the customer, in effect charging
for the time and effort. If no profit is made, the loss is borne by the customer and financail institution usually takes no fee.
Musharaka
Musharaka means partnership. It involves you placing your capital with another person and both sharing the risk and reward.
The difference between Musharaka arrangements and normal banking is that you can set any kind of profit sharing ratio, but
losses must be proportionate to the amount invested.
