Mortgages And Loans Islamic Finance Avoids Interest

Mortgages And Loans Islamic Finance Avoids Interest



Mortgages And Loans .​
Islamic Finance Avoids Interest.
Two million Muslims in​ the​ UK face an​ ethical dilemma if​ they want a​ mortgage or​ a​ loan .​
Conventional mortgages and loans all require the​ payment of​ interest and riba as​ interest is​ called under Islamic law,​ is​ forbidden by the​ Koran.
British financial institutions are increasingly catering for Muslims' specialist needs through a​ number of​ alternative arrangements that respects the​ teachings of​ the​ Koran .​
Here are just two of​ them:
Ijara with diminishing Musharaka – the​ mortgage alternative.
Ijara with diminishing Musharaka is​ an​ Islamic alternative to​ a​ conventional UK mortgage and has been adopted by several British banks and building societies.
In essence,​ Musharaka means partnership .​
Under this Islamic financial concept,​ the​ bank buys the​ house and legally becomes its owner .​
Then throughout the​ pre-agreed period,​ say 25 years,​ a​ monthly payment is​ made .​
Each monthly payment includes a​ charge for rent and a​ charge that buys a​ small proportion of​ the​ house itself .​
It's form of​ variable shared equity plan with the​ proportion of​ the​ house being owned by the​ purchaser,​ steadily increasing as​ payments are made .​
Once the​ final payment has been made,​ the​ house is​ owned outright .​
Ijara
Here you​ tell the​ bank or​ financial institution what you​ want,​ for example a​ car,​ and they buy it .​
In return for a​ monthly payment that covers the​ cost of​ the​ bank's capital,​ the​ bank then allows you​ to​ use the​ asset for an​ agreed period .​
In reality,​ it's a​ form of​ leasing
Islamic finance is​ not widely available in​ the​ UK – so where can find it? Here are three suggestions:
Over the​ last few years Lloyds TSB has introduced Islamic products to​ 33 of​ its branches .​
Their spokesperson says,​ It's important for our customers to​ see that we are following the​ right procedures .​
We have a​ panel of​ four Islamic scholars who over-see the​ products .​
They offer guidance on​ Islamic law and audit the​ products.
Another high street bank,​ HSBC,​ is​ developing a​ special range of​ Islamic products under the​ Amanah brand name .​
This range includes home finance plans,​ home insurance,​ commercial finance,​ and various current accounts and pensions .​
Hussam Sultan,​ the​ Amanah product manager says,​ as​ a​ bank,​ we are not here to​ moralise or​ tell our customers that Amanah finance is​ the​ way to​ please Allah .​
We're just here to​ provide them with a​ choice.
The Islamic Bank of​ Britain has three branches in​ London,​ two in​ Birmingham and one each in​ Leicester and Manchester .​
They're the​ only British bank specifically providing for Muslim customers and claim to​ be halal throughout their operations .​
All their financial products are approved by their Sharia'a Supervisory Committee – all Muslim scholars who are experts in​ all aspects of​ Islamic finance.
For your interest we show below,​ definitions of​ some words used widely in​ connection with Islamic finance.
A Glossary of​ selected Islamic words used in​ finance.
Amanah : Means trustworthiness,​ with associated aspects of​ faithfulness and honesty .​
As a​ central supplementary meaning,​ amanah also describes a​ business deal where one party keeps another's funds or​ property in​ trust .​
This actually the​ most widely used and understood application of​ the​ term,​ having a​ long history of​ use in​ Islamic commercial law .​
It can also be used to​ describe different financial activities such as​ deposit taking,​ custody or​ goods on​ consignment.
Arbun : Means a​ down payment .​
It's a​ non-refundable deposit paid to​ the​ seller by the​ buyer upon agreeing a​ sale contract together with an​ undertaking that the​ sale contract will be completed during a​ prearranged period.
Gharar : This means uncertainty .​
It's one of​ three essential prohibitions in​ Islamic finance (the others being riba and maysir) .​
Gharar is​ a​ sophisticated concept that encompasses certain types of​ uncertainty or​ contingency in​ a​ contract .​
The prohibition on​ gharar is​ often used as​ the​ grounds for criticism of​ conventional financial practices such as​ speculation,​ derivatives and short selling contracts.
Islamic financial services / Islamic banking / Islamic finance : Means financial services that meet the​ specific requirements of​ Islamic law or​ Shariah .​
Whilst designed to​ meet specific Muslim religious requirements,​ Islamic banking is​ not restricted to​ Muslims .​
Both the​ customers and the​ service providers can be non-Muslim as​ well as​ Muslim.
Ijara : Means an​ Islamic leasing agreement .​
Ijarah permits the​ financial institution to​ earn a​ profit by charging leasing rentals instead of​ lending money and earning interest .​
The ijarah concept is​ extended to​ hire and purchase agreements by Ijarah wa iqtinah.
Maysir : Means gambling .​
It's another of​ three fundamental prohibitions in​ Islamic finance (the other two being riba and gharar) .​
The prohibition of​ maysir is​ often used as​ the​ basis for criticism of​ standard financial practices such as​ conventional insurance,​ speculation and derivative contracts.
Mudarabah : a​ Mudarabah is​ a​ form of​ Investment partnership .​
Here,​ capital is​ provided by the​ investor (the Rab ul Mal) to​ another party (the Mudarib) in​ order to​ undertake a​ business or​ investment activity .​
Profits are then shared according to​ pre-arranged proportions but any loss on​ the​ investment is​ born exclusively by the​ investor and the​ mudarib then loses the​ expected income share.
Mudarib : the​ mudarib is​ the​ investment manager or​ entrepreneur in​ a​ mudarabah (see above) .​
It is​ this managers responsibility to​ invest the​ investor's money in​ a​ project or​ portfolio in​ exchange for a​ share of​ the​ profits .​
a​ mudarabah is​ essentially similar to​ a​ diversified pool of​ assets held in​ a​ conventional Discretionary Managed Investment Portfolio.
Murabaha : means purchase and resale .​
As opposed to​ lending money,​ the​ capital provider purchases the​ required asset or​ product (for which a​ loan would otherwise have been taken out) from a​ third party .​
The asset is​ then resold at​ a​ higher price to​ the​ capital user .​
By paying this higher price by instalments,​ the​ capital user effectively gets credit without paying interest .​
(Also see tawarruq the​ opposite of​ murabaha.)
Musharaka : This means profit and loss sharing .​
It's a​ partnership where the​ profits are shared in​ pre-arranged proportions and any losses are shared in​ proportion to​ each partners' capital or​ investment .​
In Musharakah,​ all the​ partners to​ the​ commercial undertaking contribute funds and have the​ right,​ but without the​ obligation,​ to​ exercise executive powers in​ that undertaking .​
It's a​ similar concept to​ a​ conventional partnership and the​ holding of​ voting stock in​ a​ limited company .​
Musharakah is​ regarded as​ the​ purest form of​ Islamic financing.
Riba : This means interest .​
The legal concept extends beyond interest,​ but in​ simple terms,​ riba covers any return of​ money on​ money .​
It does not matter whether the​ interest is​ floating or​ floating,​ simple or​ compounded,​ or​ what the​ rate is​ .​
Riba is​ strictly prohibited under Islamic law..
Shariah : This is​ the​ Islamic law as​ disclosed in​ the​ Quran and through the​ example of​ Prophet Muhammad (PBUH) .​
a​ Shariah product must meet all the​ requirements of​ Islamic law .​
To facilitate this,​ a​ Shariah board is​ usually appointed .​
This board or​ committee is​ usually comprised of​ Islamic scholars available to​ the​ organisation for guidance and supervision for the​ development of​ Shariah compliant products.
Shariah adviser : Means an​ independent professional,​ usually a​ classically trained Islamic legal scholar,​ appointed to​ advise an​ Islamic financial organisation on​ the​ compliance of​ its products and services with Islamic law,​ the​ Shariah .​
While some organisations consult individual Shariah advisers,​ most establish a​ committee of​ Shariah advisers (often known as​ a​ Shariah committee or​ Shariah board).
Shariah compliant : Means the​ activity that ensures that the​ requirements of​ the​ Shariah,​ or​ Islamic law are observed .​
The term is​ often used in​ the​ Islamic banking industry as​ a​ synonym for Islamic- for example,​ Shariah compliant financing or​ Shariah compliant investment.
Sukuk : This has similar characteristics to​ a​ conventional bond .​
The difference is​ that that they are asset backed and a​ sukuk represents the​ proportionate beneficial ownership in​ the​ underlying asset .​
The asset is​ then leased to​ the​ client to​ yield the​ profit on​ the​ sukuk.
Takaful : This is​ Islamic insurance .​
Takaful plans are designed to​ avoid the​ characteristics of​ conventional insurance (i.e .​
interest and gambling) that are so problematical for Muslims .​
They structure the​ arrangement as​ a​ charitable collective pool of​ funds based on​ the​ comcept of​ mutual assistance.
Tawarruq : When used in​ personal finance,​ a​ customer with a​ cash requirement buys something on​ credit on​ a​ deferred payment basis .​
That customer then immediately resells the​ item for cash to​ a​ third party .​
The customer thereby obtains cash without taking an​ interest-based loan .​
Tawarruq is​ the​ opposite to​ murabahah.




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