Halal investments a guide for Muslim women
With the financial landscape changing constantly, Muslims are looking out for investments that are profitable and Sharia compliant. With so many Muslim women managing their own finances and the finances of their home, there is an increased demand for halal investments.
Making spiritually aligned investments seems more important than ever in todays society.Whether it is investing in the stock market, the exchange-traded fund, personal savings, having an ISA or looking to invest in real estate, more and more Muslim women are looking for smarter ways to invest.
So, what are the things you need to look out for when considering halal investment? Let's take a look.
Understanding Halal Investments
Halal investments are those financial activities that are compliant with Islamic finance rules and Sharia law. Islamically, financial dealings which are based on interest or speculation are not permitted. This means many Muslims will not invest.
Islamic finance investments are more focused on investments that are ethical and deemed to be socially responsible. That is, they offer some tangible benefit to society and are not exploitative or speculative.
For an investor looking for a halal investment, they need to look out for the following:
- the investment must avoid any form of interest: charging or paying interest is haram in Islam. This means that if you are investing in an industry that includes interest or is deemed to be a haram industry then this is not permitted.
- the investment should avoid any kind of ambiguity: this means that any form of investment in stocks and shares that is akin to gambling is not allowed. There must be clear terms and conditions and transparency in all transactions that relate to any asset or money.
- It is important to avoid haram: this relates to any industry or dealing that is haram.
- social responsibility: it is important to ensure that any investment aligns with your ethical responsibilities under Islam and is socially responsible. To invest in arms production would not be deemed to be halal, nor would investment in the alcohol industry.
Navigating Financial Products That Are Halal
Halal investment can take many different forms. They include the following:
- Islamic banking: banks and other financial institutions often offer services and products that are halal. You can use a Sharia compliant bank account to save your money.
- Islamic mutual funds: these kinds of funds have been vetted to ensure they are Sharia compliant (although you should also make your own enquiries). Islamic mutual funds invest in Sharia compliant industries, markets, and assets. Investors share in the profits generated and also in the losses if they occur.
- Islamic real estate: investments in real estate are becoming more common with the onset of Islamic finance mortgages and funding options.
- Islamic bonds (sukuk): Islamic bonds are the type of financial instruments that are fully compliant with Sharia law. They offer investors ownership in an asset and the profits and revenue are generated by the asset.
- Halal stocks: companies that operate in a halal way offer stocks that can be purchased by investors.
- Exchange-traded funds: you can find halal ETFs on the market if you look carefully. There are many ETF products that invest in a range of halal stocks and other permissible assets.
- Islamic crowdfunding: some platforms are now offering Islamic crowdfunding options and peer lending options from one person to another. If thinking of making an investment on such platforms make sure that they are Sharia compliant.
Empowering Women
There are growing numbers of young professional women who want to invest and manage their money in a Sharia compliant way. For these women investing in halal companies and stocks is not simply about wealth management but also about adherence to the rules of Islam.
The empowerment of women in the financial sector has always been a practice in Islamic societies. The very fact that women often manage the household finances and then have to ensure they have sufficient funds for the charitable payments of zakat, means that women have always been financially literate.
In Islam, mutual consent in financial dealings is one of the central concepts of Islamic finance. This has meant that women have been involved in decisions about payments and finances from the start.
Women And Business In Islam
Historically, Islam has always promoted the independence of women whether that is in the fields of education, trade, and finances. Historical accounts document that Muslim women were engaged in trade and business many centuries ago. For example, the wife of Prophet Muhammad (PBUH) was a very successful businesswoman.
Islam has always had legal protections in place for women to protect and grow their finances. These protections have secured Muslim women's rights in marriage, in inheritance, and in succession.
Halal investing is linked to faith and encourages Muslim women to view their wealth as a blessing from God and one that needs to be shared and stored ethically. In Islam, women and business are not mutually exclusive. In fact, Islamic history teaches us that women have always been active participants in the business world.
Islamically, women are entitled to own, invest and manage their own funds.
Explaining Interest-Free Finance
For anyone looking to manage their finances in a Sharia compliant way, the very first step is to ensure you are not charging or paying any form of interest.
Interest free finance operates without including interest in financial transactions. When it comes to investing, it is important that you stay away from interest and any industry that relies heavily on interest or debt based finance.
Interest is seen as very exploitative and unethical.
Interest free finance operates on the basis that both parties to the transaction share the profit and the risk. The focus is on real economic activity that generates profit, rather than using money to create money via interest.
Educating yourselves on the core concepts of Islamic finance will ensure that any investment activity you take part in will be Sharia compliant.
Define Goals And Objectives
Identify what your financial goals and objectives are. Look for a market that appeals to you and aligns with your personal values. This should also apply to other forms of investment such as your pension. Is your pension being invested in companies that align with your ethical position? Always do your due diligence and research the industries your finances are involved with.
Spread your investments. Diversify your portfolio as this will not only reduce your risk but enable you to do more social good with your money. It is not necessarily always the case that investing in one kind of stock or bond will yield the best results.
Look at halal index funds and examine the market of each fund. How do they operate? Where do they operate? what information do you have about the return you will receive? Is the service being offered Sharia compliant? what practices does the industry use? How do they pay?
If any industry is non-compliant with Sharia rules then stay away from it.
The value of your investment should not be based on speculative activities or interest. This applies to any form of investment and savings accounts.
Choosing The Right Provider For Halal Financial Services
It is essential that you consult with Islamic finance experts and scholars if you are unsure of investing. An educated Islamic finance expert will ensure that your investment choice is Sharia compliant and regulated properly in the UK.
Once you have made the investment you must undertake periodic evaluations. Regularly reviewing your investment portfolio will ensure it continues to align with your ethical and financial goals. Don't assume that an investment will remain Sharia compliant throughout its lifetime. Companies change course depending on the economy so keep an eye on the Sharia compliancy.
Aligning Values With Ethics And Wealth
When it comes to aligning values with ethics and wealth, Muslim women are embracing the principles of Islamic finance and Sharia compliant investment. Whilst Islam is centred around the the 5 pillars (declaration of faith, prayer, charity, fasting, and hajj pilgrimage), Muslims are also expected to follow the Sharia.
Pursuing halal investment and savings not only ensures that you live a Sharia compliant lifestyle, but also ensures that you live a more meaningful and ethical life.
It is essential to educate yourself and gain an understanding of Islamic finance principles. Stay informed about the different financial instruments that are available and assess them for compliance with Islamic principles. Screen investments and work with companies who also align themselves with Islamic finance rules.
The world of Islamic finance based investments is widening year on year, so there are plenty of options available out there. Regularly review your investment portfolio and make any adjustments you need to. Finally, be patient and be ethical.
Qardus do not provide financial or investment advice.
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Introduction
As the global financial landscape continues to tackle the recession, inflation, and a cost of living crisis, Islamic finance is emerging as a resilient and stable financial system. Grounded in ethics and transparency, Islamic finance aims to ground financial dealings in ethics and risk sharing. This in itself is one of the main reasons that Islamic finance is helping people and organisations to override the impact of inflation.
Islamic finance has the ability to navigate the challenges posed by inflation through its distinct features and principles which are rooted in Islamic Sharia law.
WHAT IS INFLATION?
Inflation is the measure of how expensive goods, services, and products become over a period of time. Inflation can lead economies and entire countries into instability and financial turmoil. The rate at which the cost of goods and services increases over a period of time is the rate of inflation.
Inflation is usually a broad measure, but it can also be narrowly calculated. For example, currently in the UK by examining the cost of milk and eggs now and comparing it to this time last year, we can assess the inflation rate very closely.
Measuring Inflation
We usually measure inflation by looking at different economic indicators and indices. These indicators reflect the differences in prices over a specific period.
Some of the methods and tools we use to measure inflation include the following:
- GDP Deflator: the gross domestic product deflator compares the GDP over a period of time. It reviews the overall price level of services and goods an economy produces. Changes to the GDP deflator are indicative of whether the increase in nominal GDP is due to actual output or changes in prices.
- Consumer Price Index (CPI): the consumer price index is the most widely used indicator when examining inflation rates and measuring them. the CPI tracks the average cost of a basket of goods and services over a period of time.
- Producer Price Index (PPI): the producer price index examines the average change that takes place over time in selling prices domestic goods producers receive.
- Cost of living index: this index reviews the changes in price to the cost of living essentials including food, goods, and services. This index looks at factors such as consumer preferences and shopping habits and the changes in prices they pay.
WHAT CAUSES INFLATION?
There are many different factors that can lead to inflation. We cannot look at what causes inflation without referring to the root cause of inflation. At its very core, inflation is driven by there being too much demand in relation to the supply available.
So, what causes demand to outpace the supply? There are a few different reasons this can happen, but they include major disruptions to economic input such as energy (see the Ukraine war for example). If there is uncertainty around the supply of anything then this can lead to higher costs.
The government's monetary policy can also cause inflation. For example, if the UK government keeps the interest rate as low as possible for too long this can lead to inflation.
The bottleneck of global supply chains is another reason that drives inflation.
Islamic Finance Principles
Islamic finance operates on principles that are compliant with Sharia law. There are some commonalities between Sharia rules and conventional finance rules, however, there are also some stark differences.
Sharia rules relating to financial transactions deem interest (riba) to be completely impermissible. Similarly, dealings that involve uncertainty or speculation (gharar), or involve haram industries (such as gambling and alcohol) are also not permitted. Another area where Islamic finance differs from traditional finance is that Islamic finance is based on the distribution of wealth. It encourages people to participate in economic, business and personal investments using an ethical framework.
Islamic finance has an underlying principle that everything, including money, belongs to Allah. It therefore follows that interest and excessive risk and speculation are forbidden. For someone looking for an investment compliant with Islamic finance, they must ensure that any financial arrangement they enter into does not include any impermissible transactions or sectors.
Let's have a look at some of the ways Islamic finance principles are tackling inflation head-on.
HOW DOES ISLAMIC FINANCE MITIGATE INFLATION?
Islamic finance is not based on fractional reserve banking. This is the system most commonly used by conventional banks and involves banks holding what is known as a fraction of their customers money. The rest is loaned out to borrowers of the bank.
Add to this the prohibition of interest which itself can lead to instability in the market and is susceptible to market changes, Islamic finance is a more stable way of managing finances. Interest can also distort the supply and demand within a market. Under Islamic finance rules, all products and services should face natural market conditions, and not conditions that have been distorted by interest-based credit and debit.
Another important Islamic rule to mention here is the principle of zakat - one of the five pillars of Islam. Zakat (obligatory charity) aims to support the less fortunate in society and to distribute wealth throughout society. The whole concept of zakat goes against artificial supply and demand, price gouging, price fixing, and amassing large sums of money.
Asset Backed Financing
Many Islamic finance transactions include asset backed financing. Asset backed financing is one of the key concepts of Islamic finance. Essentially, it focuses on linking transactions to tangible assets. This is a departure from conventional finance instruments which are based on borrowing and lending money with interest. They generate income via interest payments and not by linking them with real assets.
Linking finance with tangible assets is one way that Islamic finance ensures there is transparency and an ethical framework underpinning savings, transactions, products, businesses and relationships.
Relying on tangible assets (such as real estate) enables Islamic finance to move away from interest based systems that fluctuate based on the value of currencies. Tying itself to real assets means that Islamic finance can reduce the overall impact of inflation by tying itself to stable assets that are not as impacted by volatile markets.
Risk Sharing
Another key hallmark of Islamic finance that is used to combat inflation is the promotion of risk sharing contracts. Essentially, these types of arrangements distribute the risks each party takes on, as well as the potential rewards.
This means that in a volatile economy both parties share the fallout and one party is not unduly burdened.
Mudarabah And Musharakah
Musharaka and Mudaraba contracts are risk sharing contracts. They encourage both parties to share in the risk. For example, one party can invest capital and the other party invests experience. Any profits or revenue generated are shared by the parties as per a pre-agreed ratio.
This structure is dynamic and transparent and is more resilient than conventional contract arrangements. The burden of economic shocks, fluctuations, and inflation is shared between the parties to the contract.
Inflation can cause huge problems for contractual arrangements, especially is one party is taking on all the risk. Sharing the risk mitigates the impact of inflation and spreads them out creating a more resistant and adaptive financial system.
Avoiding Interest
If you are dealing with a bank in the West, you will find that their products, services, and dealings are interest based. One of the main principles of Islam and Islamic finance in particular is that we must avoid interest. It is deemed to be completely haram.
In conventional finance systems. interest rates are impacted during inflation and they are adjusted to combat inflation. This is the case in the UK where the Bank of England has been steadily increasing interest rates.
By avoiding interest completely, Islamic finance is able to use alternative mechanisms to ensure transactions are safe and secure. This means the Islamic finance system is less susceptible to increasing inflation rates.
Stable Finance Amid Fluctuations
Interest rates play a key role in conventional financial systems. They do not play any part in the Islamic finance system. They are deemed to be exploitative and unstable by Islam.
Interest rates are vulnerable to the structures and systems within society and they are especially vulnerable when it comes to inflation. By avoiding interest completely, Islamic finance is able to withstand currency and economic fluctuations. This leads to a more robust and resilient financial environment.
Productive Economic Activity
Islamic finance places emphasis on real economic activity. It encourages investment in real assets and ventures that are productive. The aim is to lead to economic growth, help vulnerable communities to grow and stabilise, and to create jobs. All these endeavours should be able to withstand the terrible effects of inflation.
By focusing on productive activities that lead to improvements in the wellbeing of society, Islamic finance positively impacts the economy and society.
The goal is not selling or purchasing simply for the sake of it, but to engage in meaningful transactions that lead to a social return and benefit. There is a focus on sustainability whether you are an individual, corporate entity, or government.
Ethis And Islamic Finance
The concept of wealth in Islamic finance is very different from the concept of money in the conventional finance system the West has. According to Islam, wealth is a blessing from Allah.
Viewing finance through a socially responsible and ethical lens means there is less scope for transactions that are unfair, speculative and exploitative.
The ethical principles embedded in Islamic finance encourage fair business practices, wealth distribution, economic justice, and ethical screening. Being socially responsible with finances result in investments that lead to social stability and benefits. This stability helps to prevent the distortions in the economy that can result from inflation.
Avoiding Harmful Monopolies
As a finance system, Islamic finance encourages staying away from harmful monopolies. The result of this is that, whilst this does not directly combat inflation, it does seek to prevent market distortions, keep competition fair and ensure no party is exploited or taken advantage of.
Harmful monopolies often operate by excluding independent and small and medium businesses. The outcome is harmful for society and means there can be inefficiencies and the misallocation of resources. This in turn leads to instability in the stock market when a stock shortage becomes apparent.
Avoiding harmful monopolies also ensures that price manipulation and inflation can be monitored and avoided. Large monopolies can often dictate the market price of a service or product. In order to keep pricing fair and transparent, Islamic finance encourages avoiding harmful monopolies.
Harmful monopolies aim to concentrate wealth in the hands of those at the top of the monopoly structure. This goes against the principle of wealth distribution which Islamic finance promotes. Wealth retention leads to social disparities and exacerbates the effects of inflation for the poor.
Having a diverse and competitive market and economy ensures that there is sustainable and ethical growth and long term stability.
Ways To Manage The Current Inflation Crisis
According to the Quran, this world is a test, and Muslims see each part of their life as a challenge that is sometimes in their favour and sometimes not in their favour. The most important thing for those wanting to remain true to Islam and Sharia law is to ensure they live within Sharia rules and make sure their finances are within the parameters of Islamic finance.
Muslims also believe that their provisions are preordained and predetermined. With this in mind, if Muslims operate within Islamic rules and principles with regard to their personal and business dealings then they can save themselves from hoarding wealth and gluttony.
Ensuring financial transactions are not interest based, not exploitative and not risky means that Muslims can mitigate against the harmful affects of inflation.
Cryptocurrency is a form of virtual currency that is based on blockchain technology. Cryptocurrency is a digital asset, and the vast majority of cryptocurrencies are based on decentralised networks. This means that the currencies exist outside of centralised structures such as governments and banks.
The blockchain technology makes it virtually impossible for the system to be duplicated, hacked, or cheated, and acts as a centralised ledger of the currency. Digital assets such as bitcoin are still relatively new assets on the global financial markets. Many Muslims are seeking clarity as to whether cryptocurrency is deemed to be halal and Sharia compliant from an Islamic perspective.
The mathematical value calculation of cryptocurrency coins is based on the algorithm of the blockchain itself. Blockchain technology is seen as being an efficient, safe, and undeletable system. This lends credence and transparency to the cryptocurrency market. The question of whether bitcoin and other digital assets are halal is one that has been discussed and debated in recent years.
The former Sharia adviser to Blossom Finance, Mufti Muhammad Abu-Bakr, compiled a report in 2019 that stated that cryptocurrencies, including bitcoin, should be deemed to be halal and permissible under Sharia law. Mufti Abu-Bakr's decision was made on the basis that all traditional (and permissible) currencies tend to have a speculative element and cryptocurrencies should therefore be permissible in Islam. Since his report, Muslims have considered investing, trading, and exploring bitcoin as a new way of transacting with others.
Scholars
In 2018, scholars from the Sharia Review Bureau in Bahrain stated that investment in cryptocurrency and coins such as Ethereum and bitcoins were permissible under Sharia law and halal. Their view was that bitcoin could be considered property (maal), and did not contain any form of interest.
Similarly, the Fiqh Council of North America has unanimously decided that bitcoin is permissible. Furthermore, the Sharia Advisory Council branch of Malaysia's security commission has advised that trading and investing in cryptocurrencies is permissible. This means that digital currencies can also be used to make zakat payments.
The Shacklewell Lane Mosque in London was one of the first mosques in the UK to accept cryptocurrency donations from Muslims. Most scholarly interpretations of digital currencies in the last few years have determined that cryptocurrencies are in fact halal.
Whilst many scholars have researched and reviewed the digital currency market, it is important for investors to undertake their own research before investing. In order to consider whether bitcoin is halal, we need to delve into the history of money from an Islamic perspective so that we can revisit the centuries-old Sharia rules relating to finance and investment.
This article will examine the historical perspective and apply the current interpretations in relation to bitcoin.
How Cryptocurrency Works
All cryptocurrency coins are virtual coins that exist in the crypto market, they do not have any physical form. The actual proof of legal ownership of the digital money is recorded on blockchain technology. The blockchain acts as a public record that records the digital growth of the coin, and the value of each coin.
Cryptocurrency works by recording transactions on a ledger and creating blocks. The ledger is available 24/7 and cannot be changed or overwritten. It is virtually impossible to counterfeit crypto, and all the computers that store blockchain technology have to 'agree' to comply with the accurate version of the ledger. When anyone purchases digital currency such as bitcoin they then own a private key that provides them with a code that authorises cryptocurrency transactions.
In the UK there are now cryptocurrency ATMs in London and further down south in areas including Plymouth and Penzance.
What Is A Bitcoin
Bitcoin was first created as a digital currency after the 2008 global market crash caused by the banks. At the time, there was a lot of interest in and demand for a decentralised system of money that was not controlled by banks and governments.Key features of bitcoin include the following:
- It is decentralised - there is no central power controlling it, instead is it based on sophisticated computer programmes
- It is transparent - everyone on the ledger can see the transactions undertaken
- It is non-repudiable - a buyer cannot claim they did not receive their coin if they did receive it
- It is easy and simple to set up
- The value of bitcoin is based on demand
- It is a trustable coin
- Anonymity - all bitcoin transactions are stored on a public ledger so there is very little secrecy
Bitcoins are traded through bitcoin exchanges. To send bitcoin to another investor you will need to use your private key to effectively 'sign off' on the transaction. Once the transaction is verified it cannot be reversed or revoked.
Islamic Perspective On The History Of Money
The history of money from an Islamic perspective can be traced back to the beginning of Islam. Islamically and under Sharia law, money is used for exchange rather than speculation or exploitation. This is one of the reasons that riba (interest) is strictly forbidden in Islam as it is seen as making a profit on money. The Islamic perspective of money and business rests on principles of social justice and non-exploitation.
Sharia laws relating to money state that to be used as a means of exchange the money should be safe, stable, and effective. The reason some Muslims are conflicted about the legitimacy of bitcoin and whether it is Sharia law compliant is that when the Quran was written there will obviously have been no mention of digital currencies as technology was not in the advanced stage it is today. This has meant that the permissibility of cryptocurrency has been open to judgement and interpretation by scholars.
Bitcoin And Islamic Finance
The question about whether bitcoin is deemed to be halal Islamically has been raised again and again as Muslims across the globe consider whether to invest in cryptocurrency. Cryptocurrency is based on supply and demand in the way normal currencies often are, and the coins themselves hold value based on the market.
Bitcoin heralded the birth of the free, transparent, global financial market. It is not surprising, therefore, that Muslims began to interact with this market. Islamic finance rules provide boundaries and regulations relating to financial dealings. Whilst cryptocurrency is still a prominent area of news and research for Islamic finance scholars and experts, what is clear is that the majority of scholars and Imams have interpreted that cryptocurrencies do not breach any of the Sharia rules relating to Islamic finance.
Bitcoin And Sharia Finance Rules - Key Principles
The main features of Islamic finance that need to be considered when it comes to bitcoin are:
- Interest (riba) - interest is prohibited in Islam
- Speculation (maysir) - speculative investment is deemed to be akin to gambling and is not permissible
- Profit-loss sharing - parties to a transaction must share the risks and rewards according to Islamic finance
- No excessive risk (gharar) - Islamic finance dictates that transactions that are uncertain or carry excessive risk are not permissible.
- Application of trade and commerce (al bai')
Examining the Islamic finance principles mentioned above, it is clear that there is room for digital assets within an Islamic finance portfolio. Bitcoin does not have an interest element, nor does it provide one party with excessive profits or losses, or excessive risk.
As the world of cryptocurrencies continues to evolve, so does the demand for Sharia compliant coins. Recently, the Caizcoin was developed in Germany and marketed as the first fully Sharia compliant digital coin. It is likely that there will be further developments of digital currencies that meet all the requirements of Islamic finance principles.
Interpretations
Although already deemed Sharia compliant by Imams and scholars throughout the world, the Islamic cryptocurrency finance market is evolving to ensure that Muslims are catered for when it comes to investing in cryptocurrency. In January 2021, CoinMENA, the Middle Eastern digital assets exchange was given the go ahead from the Central Bank of Bahrain to become a certified sharia compliant exchange.
Muslims are becoming increasingly involved with the emerging digital currency fintech market, especially younger Muslims who are moving away from traditional forms of investment and entrepreneurship.
Conclusion
Discussions around bitcoin and other forms of cryptocurrency will continue in the years to come. Although many Muslim scholars have determined that investing in cryptocurrencies is halal, there will be some Muslims who will want to adopt a wait and see policy. As long as the bitcoin investment does not include haram activities then bitcoin itself does not contravene any Islamic finance principles that regulate investment, money management and currencies. What seems clear is that conceptually, bitcoin and cryptocurrency as a whole do not appear to be impermissible according to Sharia law rules. The growth of the Islamic cryptocurrency exchanges and coins does mean that there is more clarity and regulation than ever before for Muslims looking to invest in digital currencies.
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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