Shariah Residential Property Finance explained
We do business according to a set of principles, derived from Islamic teachings, which encourage fair play and ensure that financial affairs are handled responsibly. Our property finance products are suitable for Muslims and non-Muslims alike. This page explains a bit about the principles and what they mean in practice for property finance.
The Principles
Shariah principles promote trading and enterprise to generate real wealth for the benefit of the community as a whole. It does this in a way that provides stability, is transparent and facilitates sharing of both risk and reward in an equitable way.
There are some key differences between Shariah and conventional finance and investments:
- Finance and investments must not be used to support industries or activities that are against Shariah principles. These include alcohol, tobacco, gambling, adult entertainment and arms.
- Money must be put to a good use to generate profit supported by a genuine trade or business related activity. The giving or receiving of interest (making ‘money from money’) is prohibited.
How our residential property finance works in practice
Rather than paying interest on a bank loan used to purchase a property, the customer buys the property jointly with the bank. Each party has a stake, according to the amount each has contributed. The customer leases the part of the property owned by the bank and pays a monthly rental payment. The bank is the registered owner of the property. At the end of the finance term, if all payments have been made, full ownership of the property transfers to the customer. Please refer to the Bank’s Homebuyer Guide and Homebuyer Checklist which aim to give you an insight into each of the key steps when buying your home.
In Shariah finance, the process of buying an increasing share in the property is called Diminishing Musharakah. Musharakah means ‘joint venture’, an Arabic term that can be used to describe this type of property finance arrangement.
Similar to the conventional mortgages, there are two types of Diminishing Musharakah products – Acquisition and Rent, and Rent Only.
Acquisition & Rent Diminishing Musharakah
This is the Shariah-compliant alternative to a conventional repayment (capital & interest) mortgage. Both the customer and the bank contribute a percentage towards the purchase or refinance of a residential property. The bank then leases its share in the property to the customer for the duration of the finance term.
Over the finance term, the customer makes monthly acquisition instalments – this is how the bank will sell its share of the property to the customer. With each acquisition instalment, the bank’s share in the property diminishes while the customer’s share increases.
While the acquisition instalments are being made, the bank charges the customer rent for the use of the bank’s share of the property, calculated according to the respective shares owned.
After the customer acquires the bank’s entire share, either at the end of the agreed term or in an early purchase, the bank transfers registered ownership of the property to the customer. If the customer acquires the bank’s share of the property before the end of the finance term, an Early Redemption Charge may apply depending on the product chosen.
Rent Only Diminishing Musharakah
This is the Shariah-compliant alternative to a conventional interest-only mortgage. Both the customer and the bank contribute a percentage towards the purchase or refinance of a residential property. The bank then leases its share in the property to the customer for the duration of the finance term.
Over the finance term, the customer makes monthly payments to the bank which comprise of rent only. The customer is only obliged to purchase the share at the end of the finance term, so the customer’s share in the property remains the same throughout the term. Please note that the Rent Only option is not available to new Home Purchase Plan customers.
However, if the customer wishes to acquire a part of the bank’s share in the property during the term (subject to a specified minimum) or purchase the bank’s entire share, this can be done at any time, but may be subject to an Early Redemption Charge depending on the product chosen.
Until the bank’s share has been acquired by the customer, the bank charges the customer rent for the use of its share of the property. The rent is calculated according to the respective shares owned.
Following the customer’s acquisition of the bank’s entire share, the bank transfers registered ownership of the property to the customer.
It’s the customer’s responsibility to put in place, maintain and regularly monitor any financial arrangements that are expected to provide a lump sum big enough to acquire the bank’s share at the end of the agreed finance term.
Selling your property
With both types of products, you can sell the property at any time, just like you can with a conventional mortgage. When you sell, you only have to pay the original cost of the property contributed by the bank along with an account settlement fee, and the Early Redemption Charge if applicable to your Purchase Plan, less any acquisition payments you may have made. Any increase in the property value benefits you, not us; but, just like with a conventional mortgage, a decrease in value also affects you.
For more information, please view our videos: Home Purchase Plan video or Buy-to-Let video.