Islamic finance is available to all members of the public, irrespective of religious affiliation. It is an alternative to conventional banking. The Islamic approach to finance is to make a profit as opposed to a lender/ borrower relationship which focuses on interest. This kind of approach is structured as an investment in which both parties share profit and loss.

WHAT IS AN ISLAMIC MORTGAGE AND HOW DOES IT WORK?

It functions as a no interest purchase plan – there are several variations of this core idea, however they all operate in a similar manner. The bank will purchase the property on your behalf, however the property is registered in your name. Your monthly repayments act as “rental payments”, and with every repayment you make, you essentially “buying back” a percentage of the property from the bank.

TYPES OF ISLAMIC HOME FINANCING MODELS

1. MURABAH: Is a resale with a deferred fee. The bank will purchase the property and sell it you at an agreed upon profit. You will be required to furnish the bank with a deposit, the term for repayment will be clearly stated and every instalment will include a profit charge.

• IJARA: Similar to a rent to own agreement, the bank purchases the property. A portion of each repayment goes towards payment of the purchase price. It is important to note that that ownership will only pass upon the full purchase price being settled. Therefore, the property will not be registered in your name, and you will simply be regarded as a tenant.

• DIMINISHING MUSHARAKA: This model is the most common one used around the world and in South Africa, it can loosely be described as a partnership agreement. The purchaser will have exclusive occupation and with every monthly repayment, the purchaser will be buying the bank’s share.  The percentage of ownership is determined by the initial payment by each party – if the purchaser pays 20% of the purchase price at registration, they will own 20% of the property and the bank the remainder. The transaction is called a diminishing musharaka because with each repayment the partnership and the bank’s interest in the property shrinks. At the end of the term of the agreement, the purchaser should have either bought the property entirely or have a settlement figure. 

ADVANTAGES OF USING ISLAMIC FINANCE

1. Certainty: Monthly instalments are not subject to fluctuation and are fixed for a period of 12 months and thereafter it will be reviewed for the year ahead. The profit rate is also fixed for a period of 12 months and does not fluctuate based on the prime lending rate.

• Flexibility: The purchaser may, on an annual basis, choose to acquire an increased share of the property, by making a lump sum payment on their anniversary date. By purchasing a larger percentage their term of finance will decrease significantly. The purchaser may also select terms of finance which are most suited to them ie. term of finance could be five years or twenty years depending on their needs.

The main advantage for those of the Muslim faith is that their transactions are Shariah Compliant and in line with the Islamic injunction to engage interest free transactions. The bonus is that Islamic finance offers a competitive – fixed rate deal in volatile economic conditions to all, irrespective of religious affiliation.  It should however be noted that with every model, the purchaser will be responsible for maintaining the property, payment of rates, taxes and or levies and most importantly, obtaining insurance.