Exploring the potential of Shariah-compliant finance for ethically minded first-time buyers

This editorial was featured in Mortgage Solutions

Research has shown that people increasingly want their values to be reflected in the financial products they choose, with Deloitte’s Sustainable Consumer Report 2023 revealing that a third (30%) of consumers stopped opting for brands or products due to sustainability-related concerns. According to a 2022 report by TheCityUK, the UK is a leading Western centre for Islamic finance, ranking 27th globally. Islamic finance is often perceived as more ethical than conventional baking, making it a valuable option for brokers to keep in their toolkit for their more ethically minded customers.

How is Shariah-compliant finance a more ethical alternative?

Shariah-compliant finance follows the Shariah principles of transparency, fairness and ethical venture. These principles prohibit investment into sectors perceived to cause harm to society, including gambling, alcohol, adult entertainment, tobacco and the arms industry. Subsequently, Shariah-compliant banking naturally aligns with several international frameworks for sustainable development and is widely regarded as a more ethical option to conventional banking.

At Gatehouse Bank, we have further formalised our ethical commitments by becoming a founding signatory to the UN Principles for Responsible Banking, where we have aligned our core strategy, investment and decision-making to the UN’s Sustainable Development Goals, the Paris Climate Agreement and other sustainable development frameworks.

Shariah-compliant home finance in practice

Shariah-compliant home finance products are known as Home Purchase Plans, which are commonly referred to as the Islamic alternative to a conventional mortgage.

Unlike traditional home finance products, Shariah-compliant products do not pay or charge interest. This is because Shariah principles state that money should be put to work to produce a return for the benefit of the whole community rather than generating profit in and of itself.

Home Purchase Plans encourage the sharing of risk and reward, entailing a partnership between the bank and the customer, who purchase the home together. The customer then pays the Bank rent on the share of the property they do not yet own, as well as a monthly acquisition payment. With every monthly repayment, the customer acquires an increasing portion of the home until they ultimately become a homeowner.

Overcoming the misconceptions of Shariah-compliant finance

A prevalent misconception around Shariah-compliant finance is that it is only available for those of the Muslim faith. On the contrary, Shariah-compliant banks like Gatehouse offer products to everyone – including those of all faiths, and none. A 2023 survey conducted by the Islamic Finance Council UK, revealed that 90% of respondents find it important that the finance products that they purchase align with their values and ethics , demonstrating a growing awareness of Shariah-compliant products as an ethical alternative to conventional banking.

Another misconception surrounding Shariah-compliant finance is that the customer doesn’t benefit from any appreciation in property value. This isn’t the case, as Gatehouse Bank’s products are designed so that the Bank commits to selling its share of the property back to the customer at a set price, meaning any increase in value benefits the customer.

These misconceptions, alongside the growing appetite for ethically focused financial products, present a significant opportunity for finance providers and brokers alike to continue raising awareness of these alternative finance options. Not only for customers who are seeking Shariah-compliant products, but to ensure that first-time buyers are fully aware of all their options and have the opportunity to align their financial goals to their personal values.