Islamic Finance
Shari’ah mortgages may not be the most common means of buying property in the UK but the principles behind them have stood the test of time.
To undertake a specialist finance transaction like this requires lots of due diligence and additional formalities post completion.
Bank enquiries are always extensive and can often take your legal advisor a considerable amount of uninterrupted time to collate all the information to satisfy the bank’s requirements before they can release funds. It is therefore important to choose a specialist team of lawyers with a wealth of experience in this type of finance.
What is Islamic Finance?
Islamic finance is an alternative way to obtain funding whilst keeping within the moral principles of Islam. It is based on a belief that money should not have any value in itself and that you should not make money from money, an approach which means that, wherever possible, interest – either paying or receiving it – should be avoidel.
It is an ethical approach to financial affairs that effectively affords Muslims – or indeed anyone – a means to exchange products and services that do have a value.
When can I benefit from Islamic finance?
Islamic finance can be used for home ownership plans or for Buy-To-Let purposes. Anyone can use Islamic Finance whether they are UK based or based overseas, Muslim or non-Muslim.
It is a Shari’ah-compliant alternative to a mainstream mortgage with an ethical approach. It can be used just like a conventional mortgage to purchase or refinance your property.
How does Islamic finance work?
The first, a murabaha contract, involves a bank directly buying the property in question, which is then immediately sold to the intended owner at a profit and paid for in instalments on a deferred payment basis. The maximum term for repayment tends to be limited for this type of funding due to the fixed repayments during the term of the facility.
Alternatively, the property can be purchased jointly with a bank – a musharakah (partnership) contract – and over time the purchaser gradually pays back the bank for its share. Under the musharakah structure, legal title to the property is transferred to the Bank from either the seller or the purchaser (depending on whether it is purchase or refinance transaction). The Bank then becomes the registered proprietor of the property. Beneficially, the property will be held in shares by both the Bank and the purchaser. It is for this reason that the Bank cannot agree to any requests for the beneficial interest to be held on trust for the benefit of anyone other than the Bank and the purchaser in accordance with the Diminishing Musharakah Agreement. The Bank will simultaneously grant a lease to the purchaser for the duration of facility. Under the lease, the purchaser pays rent to the Bank each month.
In both cases, the bank charges additional fees to cover its costs and to reflect the fact that it has people living in a property which it partly owns.
For more information on Islamic Finance at PLS please contact us.
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