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