Islamic Mortgages are a good financing alternative

Islamic Mortgages are a good financing alternative

There has been an increase in Islamic housing finance products across Islamic compliant banks, a move that has prompted conventional banks to offer such products.

We are witnessing increased appreciation of Islamic banking, which is based on sharing of profits and losses.

This has led to an influx of Islamic banking products, one such being the Islamic mortgage finance, which is quite attractive to potential homebuyers because it is based on Diminishing Musharaka.

Diminishing Musharaka and how it works.

The term Musharaka simply refers to a partnership established under a contract by the mutual consent of the parties for joint ownership of the property where the financier rents out its share to the customer. With each installment paid by the customer under Diminishing Musharaka, the equity of the bank reduces and ultimately the ownership of the asset transfers to the client after an agreed period.

Under the Diminishing Musharaka finance, the bank and the customer jointly purchase a property, which will be used by the customer by paying a certain amount of rent to the bank for using the bank’s share in the Musharaka assets.

Personal defaults or the property is destroyed by a natural calamity.

As opposed to non-Islamic loan where the client is liable for all costs incurred due to natural disasters or theft, under the Islamic home finance, the loss has to be shared among the co-owners of the asset according to their shares.

In case of default, the bank gives the client time so as to continue with the purchase of the shares.

Main highlights of Islamic banking

A house is owned jointly by the bank and customer under an agreed sharing ratio. Usually, units owned by the bank will be rented out to the customer through Ijarah (Islamic lease) agreement.

This rent is essentially a utilisation cost paid by the customer for using the bank’s share in the property. The customer buys the shares of the bank at pre-agreed price.

Islamic Mortgage Home loans under Diminishing Musharakah in comparison to conventional mortgages.

Under conventional mortgages, the mark-up commences the day the loan is paid by the bank, whether the buyer has taken the asset or not.

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