Buying Real Estate the Islamic Way:
Owning a home is regarded as one of the important aspects of a family’s financial goals. Since most people cannot buy homes with full payment in cash, the role of financing is critical. As buying and owning homes has become more common than ever, Muslims either had to turn to conventional financial institutions for mortgage financing, or forego purchasing a house and live in a rented property and come up with resources from family and friends to accomplish that goal.
The primary constraints in using conventional mortgages are: (a) Islam categorically prohibits riba, and based on the presumed riba-interest equivalence, conventional mortgages are Islamically unacceptable because these are interest based. (b) Also, conventional mortgages are essentially debt-based financing, and as such, the underlying contracts conflict with Islamic law that loans can be Islamically lawful only if it is interest-free.
However, based on the successful emergence of Islamic financing, Muslims in various parts of the world are now enjoying access to Shariah-compliant alternative to acquire their desired real estate property. There are a variety of Islamic real estate financing (also called Islamic mortgages) are now available to enjoy home-ownership. Muslims now can purchase homes or refinance existing mortgages using Shariah-compliant products.
Islamic mortgages are structured is a variety of ways around the world, but two common underlying methods are Ijara (lease) and Murabaha (cost-plus or mark-up sales). In case of Ijara finance structure, the buyer chooses the property and enters into an agreement about price with the seller. The Islamic financier, who assumes the legal title, then sells to the customer at the original price, with an installment payment plan. During this period the customer pays rent for the use of the property and at the end of the agreed period the customer acquires the title.
Using Murabaha method, the financier acquires the property chosen by the customer from the seller and then immediately turns around and sells it to the customer on a cost-plus basis. The agreed price is affected by the value of the property and length of financing period. The customer continues to make regular payments until the price is paid off.
Another method used is diminishing musharaka (partnership) where the financier and the customer jointly purchase a house according to the share of equity/cash they contribute. The financier charges the customer for the use of its share in the form of rent, as it would be under a lease or ijara. It means that the bank and the client jointly buy a house according to the share of cash that they contribute. The bank can then charge the client for the use of its share (rent), as it does under a lease. The customer makes payment to the financing partner and can buy the financier’s share over time or at any time by fully paying off the financier’s share.
As far as the calculation of rent or mortgage payment, once again, a variety of methods is used. Some Islamic financiers determine the value of the property by surveying comparable rented properties in the neighborhood. Others use a standard benchmark, such as LIBOR, a widely used benchmark in the international financial market. Using LIBOR as a benchmark has become increasingly more common, as noted Shariah-experts, such as Mufti Muhammad Taqi Usmani, Dr. Mohamed Ali Elgari and others, have issued fatwa in favor of using LIBOR as a benchmark to be Shariah-compliant.
Generally, all the contracts and products used to Islamically finance real estate transactions are reviewed and approved by resident Shariah-experts or a Shariah supervisory board. Now that Muslims have Shariah-compliant alternatives to conventional mortgages, they can get their dream of home ownership fulfilled in an Islamic framework and it is a relief for many Muslims.