No doubt many readers will have come across the Sharia-compliant finance option among the panoply of mortgage offerings available to their clients, but how do these products differ from standard mortgages, and who are they for?
In this article, Ben Kumordzie (pictured, left), managing associate, and Tom Ward (pictured, right), partner in law firm TLT’s structured finance team, who advised the Bank of Ireland on its recent sale of its Alburaq Sharia-compliant home purchase plans to the Birmingham-based property finance outfit Offa (a deal that closed in June of this year, with customer migration completing in early December) answer those questions.
So how do Sharia-compliant financing options differ from the conventional mortgage?
First, it is important to note that Sharia-compliant finance is driven by specific principles, rather than specific structures, meaning there may be multiple ways of providing and documenting the same product or service. The key principle making a standard mortgage unacceptable from a Sharia perspective is the charging of interest (known as Riba), which is prohibited.
Most Sharia-compliant financing options, regardless of their differences, have one key feature in common – it is the bank that purchases the property in the first instance, becoming the legal title holder. The bank then leases the property to its customer and allows them to pay in instalments to either reduce the bank’s beneficial ownership steadily over time (the Diminishing Musharaka) or emerge at the end of the term as the sole property owner (the Ijara).
Alternatively, having purchased the property, the bank may immediately resell it on to the customer at a higher price, allowing the customer to pay that higher purchase price in instalments over time (the Murabaha), although this structure would be more common in a commercial property setting.
How to support young landlords
Sponsored by BM Solutions
So, who are these products for?
The obvious answer would be members of England and Wales’s 3.9 million-strong Muslim community, who wish to abide by the tenets of their faith and are likely under-served by the range of halal finance and investment products available in the market, with mortgages being no different.
We would argue, however, that this would be an unduly narrow view. These products are for everyone for whom the offering is appropriate and there is no reason why market growth should be limited to the size of one community – those with an interest in ethical finance or for whom the product is simply a good match should not feel excluded.
Is there anything else to think about?
When presenting a client with options, it goes without saying that it is essential they understand exactly what their obligations are and how the product works, and that applies here with added emphasis.
The conventional mortgage is a feature of millions of people’s lives, and many may have varying degrees of familiarity with how they work. The Sharia-compliant home purchase plan, however, will likely be a conceptual shift, requiring clear guidance from an experienced professional.
Hopefully, we will see much more take-up of these products in the future, matched by new, competitive offerings. And it is unlikely to stop there – the outlook for these products increasingly being part of portfolio sales, forward flow funding transactions and securitisations also looks promising, cementing their place as a feature of the market.
