Unlocking the potential of ethical home finance

Unlocking the potential of ethical home finance

Multiple studies, including the latest iteration of Deloitte’s Sustainable Consumer report, have shown that ethical and environmental considerations are becoming increasingly important to consumers, often influencing their purchasing habits. This shift has been noted across the home finance market, with a recent survey by Gatehouse Bank revealing that almost half (45%) of UK homebuyers would consider using an ethical finance provider that follows Islamic principles.

This was especially the case amongst younger generations, with Gatehouse Bank’s study revealing that almost three quarters (72%) of 18–24-year-olds would consider a Shariah-compliant provider, compared to just a quarter (26%) of those aged 65 and above. This is a promising indication of improved financial education amongst younger generations, which is contributing to the narrowing knowledge gap between conventional and Shariah-compliant finance. However, there is always more work to be done in terms of debunking some of the misconceptions around Islamic finance, therefore also raising awareness of how it can provide a more ethical alternative.

What is Islamic finance?

One of the main differences between Shariah-compliant and conventional finance is around interest, as Islamic principles state that profit cannot be generated in and of itself. Instead, money should be put to work to produce a return for the benefit of the whole community. As such, Shariah-compliant banks do not pay or charge interest on their products.

Instead, Shariah-compliant providers such as Gatehouse offer Home Purchase Plans (HPP), which are sometimes referred to as the Islamic alternative to a conventional mortgage. The customer and the bank jointly purchase the property, with the customer paying rent on the portion of the property they do not yet own. With each payment, the bank’s share of the property decreases, until the customer ultimately becomes the sole homeowner.

Similarly to conventional finance, the customer will also benefit from any appreciation in property value. Gatehouse Bank sells its share of the property back to the customer at a set price from the outset, meaning any increase in value benefits the customer.

For all faiths and none

One of the most prevalent misconceptions around Shariah-compliant finance is that it is exclusively for consumers of the Muslim faith. However, Islamic finance is open to all, including those of all faiths and none. In fact, it is often viewed as a more ethical alternative to conventional finance, as it follows the Shariah principles of transparency, fairness and ethical venture.

Further data from Gatehouse Bank revealed that 37% of UK homebuyers would be most attracted to Shariah-compliant providers because they do not invest in unethical sectors, including alcohol, tobacco, adult entertainment, gambling and the arms industry. This creates a natural alignment between Shariah-compliant finance and several frameworks for sustainable development. At Gatehouse Bank, we have further formalised our commitment to doing good for the environment and society by becoming a founding signatory to the UN Principles for Responsible Banking.

When it comes to raising awareness around Shariah-compliant finance, there is more work to be done. With demand for ethically focused products becoming more apparent, it is important that both home finance advisers and brokers have a strong understanding of Shariah-compliant finance to offer valuable guidance to customers who are seeking these ethical alternatives.