Sharia Compliant Mortgages
Sharia-compliant mortgages, also known as Islamic mortgages or halal mortgages, are home purchase plans that adhere to Islamic law (Sharia) by avoiding the payment or receipt of interest (riba). They offer a way for Muslims, and others who prefer ethical financial products, to buy a property without violating their religious or ethical values. Lenders ensure their Islamic mortgage products are compliant with Sharia law by using the guidance of Islamic finance and Sharia law scholars. Some Landers and Islamic banks have introduced a financial product known as the “Home Purchase Plan” (HPP), which provides an alternative for Muslims who wish to acquire a house without engaging in interest-bearing loans.
The HPP operates by establishing a partnership between the buyer and the lander. Under this arrangement, the Lander jointly owns the property with the buyer. Instead of paying interest, the homeowner pays monthly rent for the share of the house they do not own. Concurrently, the homeowner gradually increases their equity in the property over time. Essentially, the Lander substitutes the traditional interest payments with a rent component.
This approach aligns with Islamic law principles as long as the transaction’s risk structure genuinely reflects a rental agreement rather than a conventional loan. Ensuring the transaction continues to meet these criteria is essential for it to remain compliant with Islamic finance standards.
Different types of Islamic mortgages exist, each with its own unique structure. Common examples include:
* Murabaha: The lender buys the property and sells it to the buyer at a higher price, with the difference representing a profit margin.
* Ijara: A lease-based agreement where the lender leases the property to the buyer, and the buyer gradually increases their ownership share over time.