Waqf - What is it and how does it work?

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.

LONDON _ A new UK-based Shariah-compliant crowdfunding platform which provides business financing to small and medium sized enterprises (SMEs) launched at the end of June.

Qardus Limited, which connects SMEs to investors, is an appointed representative of Share In Ltd, which is authorised by the Financial Conduct Authority.

Shariah-compliant crowdfunding is not a new concept in the UK, that already has platforms such as property-focused Yielders, but there are none already providing SME business financing.

“In terms of competition we would be the first to offer an Islamic business financing facility in the UK as the Islamic banks look at much larger ticket sizes,” Hassan Daher, Qardus founder and CEO told Salaam Gateway.

“In the UAE there is Beehive. Other fintechs in the UK such as Funding Circle and Iwoca only offer conventional financing facilities, not Islamic,” he added. In other regions, Kapital Boost, which was founded in 2015, was Asia’s first Islamic P2P crowdfunding platform for SMEs.

Capital at Risk. Returns are not guaranteed

July 13 2020, read the full article at Salaam Gateway: https://www.salaamgateway.com/story/uk-gets-its-first-islamic-p2p-crowdfunder-for-smes

WHAT ARE INTEREST RATES?

Interest and inflation rates are linked and affect our daily lives from the cost of our weekly shop to how much money we can borrow. Interest rates are essentially the amount borrowers are charged for borrowing money. Most banks will show the interest rate as a percentage of the total loan amount. This means that the higher the percentage, the more interest you will pay back over the term of your loan.

If you are not a borrower and you are a saver, then the interest rate will inform you how much money you will accrue in your account. the higher the interest savings rate you have the more money you will be paid into your bank account.

Interest rates vary depending on who you are borrowing from, the amount of your borrowing, the level of risk involved, and the terms of your loan.

If a lender thinks lending you money is high-risk then it is likely they will charge you a higher interest rate. In this way, the economics of a country are impacted by the interest rates.

HOW CHANGES IN THE INTEREST RATE AFFECT US?

One of the most obvious impacts of a changing interest rate is that it affects the amount of interest we are paid (as savers) or pay (as borrowers).

Any time there are changes in interest rates you should examine your savings and lending to see if you will be affected.

For those looking to borrow money, whether that is to buy a house, invest in business, or even just for the purposes of education (such as a student loan), the cost of borrowing will increase when interest rates are raised.

Current economic uncertainty means that businesses, individuals, corporations, and almost everyone in society are impacted.

For homeowners, an increase in interest rates means an increase in repayments (unless the mortgage is based on a fixed rate). Ultimately, this will result in a squeeze on household income and budgets at a time when the UK is dealing with an energy bills crisis and an increase in fuel costs.

To summarize the main effects of rising interest rates:

• increase in mortgage repayments

• increase in the cost of borrowing

• reduced consumer and business confidence

• increased incentive to save more to take advantage of the improved interest rates (but this depends on the rate being offered by banks on savings accounts)

• slower economic growth

• possible rise in unemployment

WHAT IS A BANK RATE?

A bank rate is set by the Bank of England. Arguably, it is the most crucial interest rate and is also sometimes known as the base rate.

The base rate is controlled by the Bank of England and is the rate paid by the Bank of England to businesses and banks that borrow from it.

The Bank of England is known as the central bank of the United Kingdom. They not only set the bank rate, which is currently 1.25%, but they also undertake the regulation of the banking industry, and financial business services, and they oversee the country's monetary policy. This then goes on to affect the economy including employment, wages, spending, and borrowing.

When banks set an interest rate they consider many factors in addition to the bank rate.

However, if the Bank of England changes the bank rate, then banks will also change their interest rate for both borrowers and savers in the market.

WHAT IS INFLATION?

The word inflation describes rising prices. If prices of goods and services are rising quickly then this is referred to as the rate of inflation.

Currently, in the United Kingdom the rate of inflation is 9.4%.

The rate of inflation is worked out by comparing the cost of products today and comparing the price against what the same products cost a year ago. The Office for National Statistics is the organization that is responsible for checking the price of goods and services.

If the price of production, imports, and raw materials increases then it is very likely that the rate of inflation will also increase. In addition, any increase in demand from consumers also causes the inflation rate to increase.

This is what is currently happening in the UK with the cost of living crisis.

WHAT CAUSES INFLATION?

As mentioned above, inflation is caused by various factors. The main drivers of inflation rates going up are the increased cost of production, and increases in raw materials and wages.

If inflation rates begin to increase it means that the cost of basic necessities including food and household items also rises. This can adversely affect society as many people will struggle to afford the basics and fall into debt. Inflation rates could also affect employment rates as employers also face cuts to their budgets and increased costs of operating.

Inflation does not only affect the basic necessities such as food. As we have seen recently in the UK, inflation also affects utilities, fuel costs, clothing, luxury goods, and cars.

Some of the main factors causing the rising prices in the UK, and thereby affecting the rate of inflation, include the following:

• increase in energy bills

• high fuel prices

• the war in Ukraine

• the rising cost of car prices (according to the Office for National Statistics)

• increased costs of household goods and furniture

• increased costs of food

• higher interest rates impacting homeowners

Whilst the cost of goods is rising, the wage increases are not rising in line with the cost of living.

HOW ARE INTEREST RATES AND INFLATION CONNECTED?

Theoretically, interest rates and inflation rates have what is considered to be an inverse relationship. This means that when interest rates are low, inflation is expected to rise, and when interest rates are high inflation rates should go down.

When interest rates are lower, the borrowing power of consumers is increased.

If consumers are spending but the prices of goods are going up faster than wages are increasing, then inflation rates increase. In order to encourage borrowers to borrow less and encourage them to save more the Bank of England increased the interest rate.

The aim is to slow the economy down enough to decrease inflation.

WHY HAVE INTEREST RATES GONE UP?

The Bank of England has increased interest rates so that it can reduce the rate of inflation. If the rate of inflation continues to go up in the UK then this can have many negative effects on UK residents. Currently, the inflation rate in the UK is at a 40 year high.

For example, people will have to pay more and more for goods and services. Property could lose some of its value, and fuel prices could continue to rise.

If inflation rises too high then this is called hyperinflation. This can result in a full economic collapse and devalue the currency.

WHY DID THE BANK OF ENGLAND RAISE INTEREST RATES?

The general view is that if the Bank of England raises interest rates they want people to spend less money.

When interest rates increase the Bank of England hopes that people begin to spend less and save more.

The Role Of The Bank Of England In The Economy

The Bank of England was established in 1694 as a private bank that lent the UK government money.

In 1997, the Bank of England was granted independence so that it could set the interest rates without any form of political affiliation.

The Bank of England is not connected to the Chancellor of the Exchequer as it it is important for it to base its interest rates on economic factors rather than political ones.

Not only does the Bank of England set the base rate, but they also:

• forecast the inflation rates

• issue coins and bank notes

• act as a lender of last resort for UK banks

The Current State Of The Uk Economy

According to PWC, the UK economy was recovering well from the global pandemic.

Unemployment rates were low and the labour market and service industry was recovering well.

However, the war in Ukraine was a shock to the UK economy (and economics globally), impacting it in many different ways including:

• disrupting supplies and services for all industries including retail and construction,

• leading to higher commodity prices and less revenue for businesses

• lower trade levels

• less investment flow

News agencies and websites are reporting that the UK growth outlook for the next 12 months does not look promising.

KPMG has agreed with this analysis stating that the GDP growth this year will halve and slow further in 2023 (UK Economic Outlook Report, KPMG, 2022).

According to KPMG, they predict further interest rate increases from the Bank of England. This is based on data from economic forecasts, consumer spending, interest rates, and the unemployment rates.

WHAT IS HAPPENING IN OTHER COUNTRIES?

Many other countries around the world are dealing with similar problems that the UK economy is dealing with.

According to the Office for National Statistics, the European Union is facing similar rates of inflation as the UK.

The United States is reporting inflation levels of 9.1%.

DO INTEREST RATE AND INFLATION RISES AFFECT INVESTOR BEHAVIOR?

The basic answer to this question is yes. Interest rates and inflation rates affect investor behavior. In fact, changes in inflation and interest rates affect everyone.

What it means in real terms is that any money you have saved could be worth less today than it was yesterday. High inflation rates impact the purchasing power and confidence of consumers and their spending.

Inflation rates and interest rates affect investment portfolios. If investors are finding it more expensive to borrow funds to invest then it is very likely that investments overall will reduce.

Investor Risk

Investors aim to increase their wealth and minimize their risk and tax liabilities. In an economy where interest rates and inflation are rising, there is normally an impact on portfolios and investments.

Rising inflation not only affects stocks and bonds it also affects property prices. Of course, all investment comes with a risk of losses.

Any investor with inflation-indexed assets or liabilities needs to be particularly aware of the changes in their portfolio.

Also, as interest rates rise this affects borrowing. As borrowing becomes more expensive, this leads to investors having less money available to invest.

Rises in interest rates also affect the stock market and the impact of the rise is usually felt quicker than in the general economy.

Normally, when interest rates fluctuate investors should expect the market rate of their bonds to also fluctuate. However, not all bonds are equally affected. Bonds that have short maturities may not be as impacted as bonds with longer maturities.

For investors who have a long-term outlook and planning when it comes to their portfolio, short-term changes to the interest rate should not significantly impact them.

For an investor who is looking at the long-term goal and who has a mix of assets, the long-term outlook of their portfolio should be fine.

To summarize, when interest rates increase the impact on investments includes the following:

• a rise in mortgage rates

• affect on the price of commodities

• Fall in bond prices

• Potential losses in the stock market

• fluctuations in real estate values

• increases competition between banks

Interest Rates And Islamic Finance Customers

For many borrowers, any increase in interest rates will affect how much they pay back to the bank they have borrowed from. The exception to this is those with fixed rate loans or mortgages. As the interest rate on these loans has effectively been 'fixed' for a specific period, then interest hikes or drops will not affect the repayments. Make sure to check when your fixed rate period comes to an end so you can plan accordingly.

In theory, for customers of banks who want Islamic Finance and Sharia compliant services, changes in the interest rate should not adversely affect borrowers or savers. This is because banking services based on Islamic Finance principles do not rely on interest or include any form of interest payment.

Conceptually, Islamic banking customers are not motivated by profits or gains. Therefore, changes to the interest rate should not affect them.

However, on a wider scale, any changes to the interest rates and inflation will affect all lending institutions in some way. Many Islamic Finance lenders use the base rate of the country to benchmark their repayment calculations. This means any increase to the base rate could affect the repayments for customers of Islamic finance products.

However, for economies where the interest and inflation rates and subject to fluctuation, this could lead to more people being interested in the interest-free products offered by financial institutions that offer Sharia compliant services. A research study in Malaysia found that any increase in base rates increased consumer interest in Islamic mortgages.

Ultimately, how you are affected by increased interest rates and inflation rates depends entirely on your financial circumstances and the management of your investment portfolio.