Islamic mortgages comply with Islamic law and eliminate interest, allowing devout Muslims to buy homes without compromising their religious values. Different approaches include murabahah, musharaka, and ijarah, and some companies’ products are scrutinized by Islamic scholars. This financing option is available worldwide.
An Islamic mortgage is a home loan that complies with Islamic law, allowing devout Muslims to borrow money to buy homes without compromising their religious values. There are different approaches to lending in Islamic banking and financial firms can offer their products to non-Muslims as well. This financing option is available in nations around the world, especially those with large Muslim populations and home prices too high for buyers to afford to pay cash outright.
Under Islamic law, the practice of riba, or interest, is prohibited. Islamic law does not prohibit the conduct of banking and other financial activities, but it must be done with the intention of benefiting both parties. Legal scholars argue that interest only provides a benefit to the lender, not the borrower, and is therefore prohibited. Islamic mortgages eliminate interest and may be known as la’riba, or “interest-free” loans, for this reason.
One approach to an Islamic mortgage is murabahah, an arrangement in which a bank buys a house at full price, determines an appropriate markup, and sells it back to the borrower under an installment contract. In this deal, both parties benefit, as the borrower gets assistance with home ownership and the bank makes a reasonable profit on the transaction. The two parties act as partners while the title to the house immediately goes to the borrower.
Musharaka is another option. In this type of transaction, the borrower transacts with the assistance of an investor who provides the majority of the purchase price. The two parties are property partners and one party pays the other. This arrangement is known as declining balance co-ownership, where the ultimate goal is for one partner to acquire the other. Investors are usually real estate companies, but households and businesses can also offer musharaka loans to other businesses and private individuals.
Ijarah is another form of Islamic mortgage, where the bank and the buyer enter into a rent-to-own agreement. The bank retains ownership of the property and the borrower pays the monthly rent until the balance is paid off and she owns the house free and unoccupied.
Some companies’ Islamic mortgage products are scrutinized by Islamic scholars and authorities to ensure they comply with the law. The company can provide additional information upon request to assist borrowers in the informed choice process. In other contexts, such companies may offer loans without legal compliance guarantees, and borrowers will need to evaluate the terms and conditions of a purported Islamic mortgage to determine whether it is appropriate for their needs.
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