5 financial changes for the future - what should we be looking out for?
The United Kingdom is going through a turbulent financial and economic situation. Coming out of the pandemic, navigating the financial landscape and the economy has resulted in the highest inflation we have seen in decades, alongside stagnant wages and rises in energy bills.
The cost of everything is increasing and it is ordinary people who are struggling. From the National Health Service, to the private sector, and across every community we are all feeling the pinch.
Whilst we expect the government to ensure there is sufficient funding and investment in communities, families, and industries, what is clear is that we all need to be taking steps to minimise the risk of financial losses.
Whilst the government seems more focused on climate action, decarbonisation, and reducing emissions than effective financial planning, as individuals we need to take responsibility for our own actions.
Now is the time for us to be examining out own finances and expenditure.
As we move forward into 2024 and beyond there are some key steps you can take to make sure you are in the best financial position you can be.
Get Informed
Before we move on to the steps we can take to improve our finances, we need to consider our own financial literacy.
As individuals and communities we need to prioritise learning about and understanding finance. Prepare for the future by taking the time to learn about the key principles around money and money management. Learn how interest works, and why it is deemed to be haram in Islam.
As consumers, we need to scrutinise and assess our impact on our finances and understand how we spend and save.
The more information you have the better. The worst thing you can do is bury your head in the sand.
Start by getting details of all your bank accounts, savings, direct debits and debts. Understand your incomings and outgoings and make sure you are living within your means.
One of the key principles of Islam is to live within your means. This encourages people to be mindful of how they consume and spend, and to avoid extravagance.
There are also stringent obligations to ensure that you stay away from riba (interest) and haram spending. You cannot do this properly unless you understand your finances fully.
Knowing your finances means you can avoid haram practices. Also, in order to plan effectively for the future you need to understand how your money is saved, whether it accrues interest, and how much you can save each month.
There is ample information and advice on this website to guide you along the way. In addition, technology is so advanced that these days we can check all our accounts and finances using our mobile phones. As a result, you can keep a close eye on your finances.
Focus On Sustainable And Responsible Consumption And Investing
Focusing on sustainable and responsible consumption is key for everyone, but especially Muslims who want to live in a Sharia compliant way. Islam encourages ethical and socially responsible behaviour in every area of life.
We are required to make a commitment to being sustainable and responsible. Over-consumption goes against Islamic finance principles.
Some of the best ways of achieving a more halal and sustainable level of consumption include:
- The concept of amanah
- Islam considers money and wealth to be an amanah from Allah. What this means is that Muslims act as stewards of the wealth and will be held accountable for how they use and spend it. Sharia rules guide us to use the wealth in morally and ethically sound ways, and Islamic finance provides us with the structure in which to do this. The construction of Islamic finance principles helps us to make sure we operate within Islamic principles when it comes to our finances. In personal terms, it means that we should be more considered and careful with our finances, avoiding excessive spending, and always taking care to mind our money.
- Avoiding waste
- Any kind of waste should be avoided, and this includes wasteful purchases and spending. Responsible consumption aligns with the principle of stewardship. Keep an analysis of what you spend on and how you spend and you will be able to identify and report on poor spending and then eliminate it.
- Avoiding haram but invest wisely
- As Islam prohibits actions that cause harm to others, we need to be mindful of any spending that is deemed to be haram. This includes investing in industries that are haram such as gambling, alcohol and porn industries. Instead, we should look at halal investment options and services.
- There is a huge social impact to investing in haram industries. Be mindful of where your sums are stored and being invested. The corporate world may be focused on profits, but there are socially responsible and Sharia compliant industries you can invest in. There is also increased regulation and protective policy of most investment options across the United Kingdom which means you can be assured that your money will be safe.
Think Long Term
As mentioned above, try and think long-term. When it comes to your finances, whilst it may seem like you are living from one pay day to the next, there are some small steps you can take to plan for the future. As the old saying goes - fail to prepare, prepare to fail.Planning ahead can relieve the pressure you face tomorrow. The market is fluctuating and temperamental now but it will not always be like this.
Planning ahead builds financial stability and means you can cope with emergencies when they arise. Think of the scenario of when you are much older and unable to work as hard.
Living from one pay day to the next can result in more and more people turning to debt and credit to cover their everyday expenses. Long-term financial planning helps break the cycle of debt. The UK has an ageing population, so it is even more important that we plan ahead and make the right financial decision for our future.
Here are some steps you can take to effectively plan ahead:
- Set some financial goals: these do not have to be complicated or difficult. Instead, they should be realistic. For example, one goal could be to start saving for a home.
- Create a budget: once you have a goal, go through all your financial data including incomings and outgoings. Try and track your spending to see where you can cut back and what you can do cheaper. This will help you identify any spare funds for saving. Even £5 a month will help.
- Have an emergency fund: to stop yourself from falling into debt, try your very best to have an emergency fund.
- Save and invest regularly: consistent investing, even with the tiniest amounts, can accumulate over time. When dealing with the increasing cost of living, we need to have some money set aside for emergencies.
- Ditch the debt: overspending is one of the fastest ways to end up in debt. If you are in debt there is help and support out there, so reach out and see if you can reduce your debt and lower your spending.
For Muslims, financial literacy means they can plan and prepare responsibly. It also means they can account for their zakat payments which are obligatory.
Embrace Islamic Finance Principles
Muslims are obliged to follow the Sharia rules relating to finance. For Muslims, true success comes with pleasing Allah.
Embracing Islamic finance principles is extremely important for those wanting to be compliant with Islamic rules relating to financial dealings, but also for those wanting to live and manage their money responsibly.
Islamic finance prohibits any form of interest - that includes payment of interest or receipt of it. The whole idea behind avoiding interest is that this creates a fairer society and does not burden one group more than others. Interest is seen as being rooted in unethical and irresponsible economics.
Islamic finance is based on social justice and fairness. Islam places great emphasis on ethical behaviour, through choice. This means there is an obligation on Muslims to treat all their social and economic dealings with care.
Another key concept from Islamic finance is the idea of profit and loss sharing. Sharia rules encourage profit and loss sharing arrangements. This is to ensure that both parties are treated fairly.
For Muslims looking to save costs and stay away from debt, focusing on Islamic finance rules means they can operate Islamically but also in a way that maximises their money and makes it go further.
Establish Zakat And Sadaqa
Establishing zakat and sadaqa are critically important in Islam. Zakat is an obligation upon all Muslims, whilst sadaqa is voluntary but hugely encouraged.
In order to pay your zakat you need to understand your finances fully. Calculating and paying zakat on an annual basis is essential for Muslims.
Working out your zakat requires an important wealth assessment and analysis calculation. What it means is that through the whole year you are more conscious of your spending and you are making plans for the payment of zakat.
Zakat encourages people to be aware of their financial assets and situation. This prevents the problem of not knowing how much zakat you need to pay.
Understanding the importance of zakat and sadaqa actually encourages savings throughout the year. It also helps people to budget and plan accordingly. Also, by paying zakat people are able to understand the importance of distinguishing between needs and wants in their own lives.
Sadaqa, whilst voluntary, generates a feeling of generosity, compassion and empathy. By willingly sharing our wealth with others it means we are attuned to the needs of others and can budget accordingly.
Stay Away From Debt And Interest
Now is the time to really understand and analyse your spending habits. Make more informed choices about where to spend and save your money. This encourages a more balanced and moderate lifestyle.
Managing your debt is always a good risk management strategy. If you have a credit card then try and stop using it and clear any debt you owe. Credit card debt carries high interest rates and is deemed haram.
Staying away from debt is one of the best financial decisions you can make for yourself. Debt can lead to financial strain, and negatively impacted credit scores. It also means you have overall less disposable income from jobs, and this limits you being able to set goals, save and invest for the future. This will give you greater peace of mind when preparing for the future.
Qardus Ltd do not provide financial or investment advice. It is recommended that you seek your own independent advice from a qualified professional.
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The emergence and growth of blockchain and Sharia-compliant finance has led to a debate about whether blockchain is Sharia-compliant. Both Sharia-compliant finance and blockchain are based on the same central components of fairness, transparency, accessibility and decentralisation. These similarities have led to an uptake in blockchain from Muslim markets and businesses.
What is of critical importance for those wanting Sharia-compliant finance options, is that blockchain is compliant with the rules of Islamic finance and financial transactions.
WHAT IS BLOCKCHAIN?
Blockchain is a decentralised system where records of cryptocurrency transactions are maintained and linked. This form of digital ledger technology enables transparent and secure transactions across computers.
The ledger, or digital database, acts as a growing list of records (blocks) that are all linked together. Since Bitcoin and Ethereum became known worldwide, so too has recognition of blockchain platforms and their purpose.
Blockchain - Key Features
The key features of blockchain are:
- decentralised databases: no single entity controls the data and this means it is resistant to manipulation, fraud, and censorship
- Immutability: once a transaction is logged onto the blockchain it cannot be deleted or changed.
- Transparency: all the transactions that are recorded on the blockchain are visible and transparent to all the participants in the network. This enhances transparency and authenticity.
- Secure: as each digital transaction is verified by participants being they are added to the ledger this prevents fraud and unauthorised transactions.
- Smart contracts: blockchain includes smart contracts that self-execute and automatically enforce terms. This means the room for error or fraud is massively reduced when compared to traditional contracts.
Sharia Rules And Blockchain
For Muslims looking for Sharia-compliant financial solutions, blockchain is becoming a viable option. Blockchain technology offers Sharia-compliant finance that offers transparent and secure alternatives that are compliant with Islamic rules relating to financial transactions.
According to Islamic finance rules, blockchain technology is considered to be a fairly neutral database tool that stores records in a transparent and secure way.
Sharia rules as they relate to financial transactions require adherence to Islamic finance principles that relate to ethical conduct and social responsibility. Key elements of prohibition include a ban on interest, speculation and investment in haram industries and practices.
Blockchain technology, as a secure and decentralised ledger system, certainly meets the Islamic finance standards of transparency and security. However, when assessing if any technology is truly compliant with Sharia rules several factors should be considered including the nature of the financial transaction taking place, the underlying assets, and the consensus mechanisms.
WHAT MAKES BLOCKCHAIN SHARIA-COMPLIANT?
Sharia-compliant finance revolves around fairness, equity, transparency, and risk sharing. Any blockchain technology or service needs to comply with these principles and be free from interest and speculation.
The development of currencies that are Sharia-compliant and based on blockchain technology is fast-moving. For Muslims looking for adherence to Islamic rules, blockchain is quickly able to verify transactions with a clear and traceable ledger.
It is important to note that not every blockchain transaction will be Sharia-compliant. This is in the same way that not every bank, project, return, investment, platform, and digital asset will be Sharia compliant. The compliancy will lie in the type of transaction and nature of the deal.
Islamic Finance And Blockchain
The interplay of blockchain and Islamic finance is interesting. Not only does it present opportunities to transform and innovate the industry, but it also means that blockchain-based solutions can now facilitate Sharia-compliant transactions.
Blockchain facilitates fractional ownership, asset management, and efficient cross-jurisdictional and cross-border transactions. The transparent ownership and financial records and real-time settlement blockchain offers is compliant with Sharia rules.
Put very simply, blockchain technology and platforms support Islamic finance initiatives and businesses. This means Muslims can use blockchain to invest and transact.
Zakat And Blockchain Potential
For Muslims who want to comply with one of the five pillars of Islam, zakat, blockchain technology has a great deal of potential in enhancing and facilitating compliance with this pillar. Not only can blockchain enhance the administration of zakat money, but it can also help and provide value in the administration of zakat.
Blockchain technology streamlines the distribution of payments ensuring that zakat transactions are fast and transparent. By recording zakat on immutable ledgers that are visible to all participants, blockchain is being used more and more by Muslims across the globe.
People are easily able to trace and audit their payments and zakat transactions, tracing the flow of their funds. What's more, it is easy to check if your zakat contribution is affecting those in need in the most appropriate way. This greater visibility provides clarity and precision for donors.
Blockchain has the potential to revolutionise global zakat payments by using methodology that increases efficiency, transparency, and seamlessness. Donors are able to maximise their donations automation and traceability.
Supply Chain Management
When it comes to business operations and analysis of Sharia-compliant methods, blockchain provides immutable records.
For Muslim business owners and customers, making sure of authenticity is key when it comes to analysing the halal elements of any dealing.
Blockchain technology can validate halal certifications and methodology throughout the supply chain. This provides a verifiable audit trail and ensures that Sharia-compliancy can be checked.
Blockchain And Sukuks
Blockchain technology ensures that Islamic bonds (sukuk) are transparent, secure and fully Sharia-compliant. As blockchain enables real-world assets such as property and commodities to be tokenised.
Sukuk issuers can then tokenise the assets backing each sukuk, making sure that each token issued represents a percentage share of ownership. What this means in Islamic finance terms is that the sukuk is backed by tangible assets or services, making it compliant with Sharia rules.
In addition, each sukuk issuance and transfer is recorded on the digital ledger and this helps to verify authenticity along the chain of ownership and eliminate fraudulent or speculative activity.
When used properly, blockchain can be set up to automatically screen for Sharia compliancy for users. This screening not only screens for Sharia compliance, but also verifies participants.
This level of transparency is highly encouraged in Islamic finance transactions.
Islamic Finance Asset Management
Blockchain can be used to enhance Islamic asset management portfolios. By streamlining settlement of money, blockchain enables real-time settlements of transactions. Platforms dedicated to blockchain encourage peer to peer engagement and transactions and this eliminates the need for intermediaries and third parties.
What this means is that asset management becomes more transparent and more streamlined. The level of risk is reduced, and overall efficiency is improved.
Management Of Waqf
Waqf, Islamic endowment, is the act of dedicating or endowing a property for charitable, community, or religious purposes.Using blockchain, the management of waqf can be delivered in an easier and more efficient way.
This is done via platforms that provide traceability, authenticity and audit trails.
Ethical, Safe And Decentralized
Using blockchain properly means products and services can become more transparent and screened for Islamic adherence. Investors and organisations can use blockchain technology to enhance the efficiency, integrity, and accessibility of Islamic finance solutions.
Blockchain is emerging as a safe and ethical partner for Islamic finance products and services. The hybrid of modern blockchain technology, cryptocurrency, and long established Islamic principles of exchange is a welcome one for the finance world.
Halal mortgage products and services started appearing on the market to help devout Muslims borrow money. By their very nature, mortgages have historically always been interest bearing.
Islamically, interest (riba) is strictly prohibited. This means that many Muslims were unable to access funding that would enable them to step onto the property ladder.
For many people, purchasing a family home (or refinancing) is an important lifetime investment. However, Muslims in the past have struggled to find halal mortgages that would be in compliance with Sharia principles and rules relating to financial transactions.
Previously, many Muslims not wanting to pay interest on conventional mortgage products would opt to remain in rental properties.
WHAT IS A HALAL MORTGAGE?
A halal mortgage is essentially a home purchase plan. It is not really a mortgage loan in the traditional sense of what we know a mortgage to be.
Halal mortgages are considered to be compliant with Sharia principles because they do not have a loan that is based on interest payments or accrual.
By comparison, traditional mortgages have always included interest payments.
Halal mortgages are more of a long term plan that is offered by the bank to the borrower. This purchase plan contains repayment terms and conditions. However, the purchase plan does not contain any element of interest.
What the purchase plan effectively becomes is more of a sale and lease agreement.The aim of a halal mortgage is to ensure that any prospective homebuyer who wants to purchase a home and wants the terms of the agreement to comply with Sharia law is able to access funding.
Any lender or bank that offers halal mortgages will have taken guidance and advice from experts in Islamic finance and Sharia law. This ensures that the halal mortgage products they offer are fully halal and Sharia compliant.
Comparison Between A Halal Mortgage And A Conventional Mortgage
The main difference between a halal mortgage and a conventional mortgage product is the element of interest.
In Islam, banks are not permitted to make profits from loans. Conventional mortgage loans are designed to profit the banks and the terms are often weighed heavily in favour of the banks. Customers are often required to pay back interest which can fluctuate depending on the market conditions.
The ethical Islamic finance principles that underpin halal mortgages mean that the power dynamic and relationship between banks and borrowers is more even.
HOW DO HALAL MORTGAGES WORK?
Halal mortgages do not involve the borrower borrowing a sum of money from the bank in the traditional sense.
Instead, what will usually happen is that the bank will purchase the property on behalf of the borrower. The property will then be leased back to the borrower. The repayments will cover the initial purchase price and costs, and also an uplift to enable the bank to make a profit.
The monthly repayments made by the borrower to the bank will be partly put towards buying the property back from the bank and partly towards paying rent for residing in the property.
Once the term of the halal mortgage ends, the borrower will have paid back the bank and will fully own the property.
If you are looking for a halal mortgage, then you need to ensure that the lender complies with Islamic finance / Sharia principles.
Types Of Islamic Mortgages
There are three main types of halal mortgage products that are available in the United Kingdom:
- MURABAHA
A Murabaha mortgage is one where the bank purchases the property and sells it straight back to the borrower. The bank makes a profit by selling the property to the borrower for more than it originally paid for it.
This is less of a home purchase plan, and more like a traditional mortgage process. As the home is being solD for money it is considered to be within the Sharia rules that regulate the financial transaction.
- IJARA
A home purchase plan that is an ijara one involves the bank (a Sharia compliant bank) becoming the legal owner of the property you want to buy. The bank will purchase the property and then lease it back to the borrower for a fee.
The borrower is then required to make monthly repayments on agreed terms for the fixed term of the 'mortgage'. The repayments will cover an element of rental payment, and also repayment of the capital that was used to make the initial purchase of the property.
Once the term of the mortgage ends, the borrower should have repaid the bank and be the full legal owner of the property.
Once the borrower takes full ownership of the property they can then remain in the property or sell it on.
- DIMINISHING MUSHARAKAH
Diminishing musharaka works differently to an ijara product. In this type of arrangement, the borrower and the bank jointly own the property as co-owners (similar to a business partnership arrangement). As the borrower makes the repayments, so their share of ownership increases and the banks share of the property decreases.The amount of deposit you put down will help determine your respective share of the property.
The good thing about diminishing musharaka products is that as the borrower makes the repayments, the rental repayment element decreases and the bank's ownership share will keep reducing as the borrowers increases.
DO I NEED A DEPOSIT FOR A HALAL MORTGAGE?
The answer to this question is yes. It is more likely than not that your lender will require you to put down a deposit.
Of course, the size of the deposit will vary depending on the type of product you opt for and the lender you choose.
Normally, lenders will expect to see something in the region of a 20% deposit if you want to access a halal mortgage. However, it is important for you to look around at all the halal mortgages on the market and decide which one meets your needs.
There are some products and services that require much less than a 20% deposit.
You should also be aware that there are some additional costs you need to prepare for including:
- legal costs
- survey costs
- building insurance
- stamp duty
- broker fees
Any borrower looking for a halal mortgage should know that having a good deposit puts you in a strong position.
Advantages Of Halal Mortgages
There are many advantages of having a halal mortgage, and halal mortgages are not only available for Muslims. Many non-Muslims are now accessing halal mortgage products and services as they understand the concept and underlying ethical basis they have.
Some of the main advantages of halal mortgages are as follows:
- According to experts, halal mortgages facilitate financial inclusion and access to property/ house ownership for previously marginalised groups
- Those who want to live by Islamic finance principles can access funding in order to get on the property ladder
- Islamic mortgages and services are an ethical way to fund property purchases
- Halal mortgages are regulated by the Financial Conduct Authority ( FCA ) so borrowers have protection
- Islamic mortgages are less susceptible to market crashes and changes in economics
- Halal mortgages can offer borrowers the chance to own real property with stable property value
- Halal mortgages are not normally subject to fluctuating interest rates
- Halal mortgages have been approved by scholars
- Halal mortgages do not incur or charge interest (interest is strictly prohibited in Islam)
WHAT ARE THE RISKS INVOLVED WITH HALAL MORTGAGES?
It is important to start by saying that halal mortgages are no riskier than conventional mortgages.
One of the main problems with halal mortgages is knowing where to find them and doing your due diligence. This can be a complex and time-consuming exercise.
Sometimes, the rental repayments can be higher than if you opt for a conventional mortgage repayment plan. However, this is the price that is payable for having a home purchase plan that does not charge interest.
There has some been criticism of halal mortgages in recent years for being expensive. However, most banks and lenders who offer halal mortgages will be happy to go through the terms with you and offer favourable rates and services.
If you miss your repayments under a halal mortgage, you will face the same consequences you would as if you had a conventional mortgages. If you do not make the necessary payments then you could face repossession and court proceedings.
Your initial outlay and costs may be higher with a halal mortgage. Many banks have higher administration and processing costs so always check the terms and conditions of any agreement.
However, remember that halal mortgages are fully regulated by the Financial Conduct Authority and this means borrowers have legal protection. You can visit their website to find details of the protections available to borrowers.
In addition, the Financial Services Compensation Scheme does apply to lenders offering halal mortgages.
WHAT IS A HALAL MORTGAGE?
A halal mortgage is a mortgage that complies with the Islamic Sharia rules relating to mortgages, money, and borrowing. The financing terms of halal mortgages must comply with the principles of Sharia law, and many Muslims in the United Kingdom are on the lookout for support for halal mortgage and home finance products and services when they are considering moving home.
The main difference when comparing the financing of halal mortgages and traditional mortgages is that halal mortgages do not involve the payment of any interest. The process of obtaining a halal mortgage has some slight differences when compared to obtaining a traditional mortgage but it is very similar.
Halal mortgages are alternatives to standard mortgages on the market and were created to enable Muslim customers to buy real estate using Sharia compliant finance products.
Islamic Finance Principles Relating To Halal Mortgages
Moving houses can be a stressful time. The stress can be compounded for Muslims who are looking for banks and building societies that offer halal mortgages.The four main Islamic finance principles that apply to Islamic mortgages are:
RIBA
Riba refers to usury or interest and is strictly prohibited for Muslims as dictated by Sharia law. Islamic mortgages do not have any interest payment elements. This means that Muslims can get on the housing market and purchase property without being in breach of Sharia law.
IJARA
Ijara is an Islamic financing structure whereby the bank or building society that are financing the property purchase will buy the property and lease it back to you for a fixed monthly cost that has been agreed between the parties.
MUSHARAKAH
Musharaka refers to joint partnerships where you can make a decision with the bank to own separate shares in the property. As more and more monthly payments are made, thus the share owned by the bank is reduced until the homeowner owns the property outright. Co-ownership agreements like these are not common in the UK and are more common in commercial transactions.
MURABAHA
Murabaha is when the bank buys the whole of the property and sells it back to you for a higher price. The higher price is repaid in instalments and means that the bank can recover its costs, and the homeowner does not have to pay interest on the mortgage loan.
The structures within ijara, musharak and murahaba arrangements mean that Muslims can structure their finance terms in Sharia compliant ways.
HOW DO HALAL MORTGAGES WORK?
When looking for a halal mortgage, the general rule is that you should approach those banks or institutions that can prove that they work in a Sharia compliant way, and that they have been advised by an Islamic sharia law authority. Islamic mortgages are regulated by the Financial Conduct Authority. This means there are protections for Muslims looking for support when searching for halal mortgages.
When looking for lenders in the United Kingdom that offer halal mortgages, it is always advisable for Muslims to undertake additional due diligence on the terms and payments being offered by the bank.
Buyers should then compare the terms and process offered with other Islamic finance lenders on the market.
ARE HALAL MORTGAGES EXPENSIVE?
For Muslims looking for halal mortgages to purchase property, they normally need to ensure that they have a large deposit ready. Lenders offering halal mortgages will usually have higher administration costs.
Additionally, in exchange for not having an interest payment element anyone who takes on a halal mortgage may need a deposit of up to 20%. You should also factor in the costs of a survey, insurance, fees, stamp duty, and legal fees.
Before deciding on a lender, it is good practice to check the Financial Conduct Authority website to check that the lender is registered with them and therefore regulated.
Risks Associated With Halal Mortgages
Ethically, halal mortgages are far superior to traditional mortgages. Both parties in a halal mortgage transaction are beneficiaries. The risks may not be the traditional risks associated with non-halal mortgages (for example, increases in interest rates every few years), but you are still likely to face penalty payments if you have a co-ownership agreement with the bank for the property. This means that if you fail to make payments on time then you could be fined or face repossession.
One thing to watch out for when you are looking for Islamic mortgages is the stamp duty costs. Normally, a buyer pays stamp duty when the purchase of a property (if the property is over the UK stamp duty thresholds). With halal mortgages, as the bank is buying the property and then you are buying from them, this equates to a double payment of stamp duty.
Of course, the stamp duty costs also depend on whether you are buying your property back from the bank, or whether you have a co-ownership agreement with them.You should discuss the stamp duty costs with the bank before taking on the mortgage.
You should also note that although the bank legally owns the property, you may need to insure the property and deal with the general maintenance and upkeep of the property. Always make sure to add any additional costs to your overall purchase plan.
The Process
The process relating to taking out a halal mortgage is actually very similar to that of a traditional mortgage.This is what normally happens:
- The buyer will choose a property
- The buyer will negotiate and agree on the price with the seller
- The Islamic mortgage provider/bank will buy the property
- The bank will sell the property back to you at a higher price
- As a buyer, you will repay the bank in a series of installments
With a traditional mortgage, you would then take a loan from a bank and begin paying the repayments. With an Islamic mortgage there is no interest payable. Instead, the bank will buy the property and sell it back to you for a higher price. This is a form of halal refinancing arrangement.
For example, if the property is valued at £100,000, the bank may sell it to you for £140,000. As a buyer, you can repay this sum over a period of time.You should note that there are usually administration fees associated with halal mortgages, as there are with traditional mortgages. However, the fees for Islamic mortgages are usually lower.
Benefits Of Halal Mortgages
The most obvious benefit is that halal mortgages are not susceptible to fluctuating interest rates. As there is no interest payment element, as a buyer you will not have a changing rate of repayment.
However, if you have a lease agreement with the bank you may find the repayment rate is subject to change. This is why is it is important for Muslims to assess the terms of the halal mortgage.
Ultimately, the risks associated with halal mortgages are minimised on account of the bank sharing the risk with the buyer. Once the bank has agreed to sell the property at a fixed price, this price cannot change irrespective of market conditions.
Mainstream
As the Islamic finance world continues to grow to meet the demand from Muslims across the globe, so too are the options for halal mortgages. Islamic finance has firmly entered the mainstream finance world.
In addition, as halal mortgages are seen as ethically sound many non-Muslim customers are also keen to take advantage of the terms offered by Sharia compliant banks.
Many UK banks and building societies are now offering halal mortgages including Al Rayan Bank and United Bank Limited.
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