Islamic Finance

50 Islamic Finance in Practice

Comparison of home finance instruments

Murabaha Ijara wa iqtina Diminishing

musharaka

Title holder Customer Financial institution Both (freehold with

financial institution

and long leasehold

with customer)

Rate of profit / rent Fixed Fixed / variable Fixed / variable

Prepayments

allowed?

No Yes Yes

Refinance available? No (unless the

financier agrees to a

discount for the

customer on the

original finance)

Yes Yes

Asset risk Customer Financial institution Both the financial

institution and the

customer

The diminishingmusharakaandijara-based home finance is by far the

most popular product in the UK. Currently all providers of the home

purchase plan provide this product. This is mainly due to the flexibility of

the product for both the customer and the bank as it allows the bank to

change rates or fix them for as long as required, and it allows the customer

to benefit from an increasing share in the house over the term giving him

more confidence.

Barriers to Islamic home finance

In 2002, Datamonitor estimated that the UK’s Islamic mortgage market

could be worth as much as £9.2 billion in outstanding balances. However, a

combination of factors served tosuppress the market at that time:

• Stamp duty was required to be paid twice, that is because the nature of
  Islamic home finance products involves initial ownership by the financier,
  with ownership passing to the customer at the end of the term. This led
  to amendments in taxation legislation in the UK to remove this
  requirement for Islamic home finance products;


• Higher regulatory capital ratio, where conventionalmortgagesandindeed
  murabahahome finance attract a capital risk weighting of 50 per cent,
  ijaramortgages attract a higher rate of 100 per cent. However, under