Two million Muslims in the UK face an ethical dilemma if they
want a mortgage or a loan. Conventional mortgages and loans all require
the payment of interest and "riba" as interest is called under Islamic
law, is forbidden by the Koran.
British financial institutions are
increasingly catering for Muslims' specialist needs through a number of
alternative arrangements that respects the teachings of the Koran. Here
are just two of them:
Ijara with diminishing Musharaka - the mortgage alternative.
Ijara
with diminishing Musharaka is an Islamic alternative to a conventional
UK mortgage and has been adopted by several British banks and building
societies.
In essence, Musharaka means partnership. Under this
Islamic financial concept, the bank buys the house and legally becomes
its owner. Then throughout the pre-agreed period, say 25 years, a
monthly payment is made. Each monthly payment includes a charge for rent
and a charge that buys a small proportion of the house itself. It's
form of variable shared equity plan with the proportion of the house
being owned by the purchaser, steadily increasing as payments are made.
Once the final payment has been made, the house is owned outright. Ijara
Here
you tell the bank or financial institution what you want, for example a
car, and they buy it. In return for a monthly payment that covers the
cost of the bank's capital, the bank then allows you to use the asset
for an agreed period. In reality, it's a form of leasing
Islamic finance is not widely available in the UK - so where can find it? Here are three suggestions:
Over
the last few years Lloyds TSB has introduced Islamic products to 33 of
its branches. Their spokesperson says, "It's important for our customers
to see that we are following the right procedures. We have a panel of
four Islamic scholars who over-see the products. They offer guidance on
Islamic law and audit the products".
Another high street bank,
HSBC, is developing a special range of Islamic products under the Amanah
brand name. This range includes home finance plans, home insurance,
commercial finance, and various current accounts and pensions. Hussam
Sultan, the Amanah product manager says, "As a bank, we are not here to
moralise or tell our customers that Amanah finance is the way to please
Allah. We're just here to provide them with a choice".
The Islamic
Bank of Britain has three branches in London, two in Birmingham and one
each in Leicester and Manchester. They're the only British bank
specifically providing for Muslim customers and claim to be halal
throughout their operations. All their financial products are approved
by their Sharia'a Supervisory Committee - all Muslim scholars who are
experts in all aspects of Islamic finance.
For your interest we show below, definitions of some words used widely in connection with Islamic finance.
A Glossary of selected Islamic words used in finance.
Amanah:
Means trustworthiness, with associated aspects of faithfulness and
honesty. As a central supplementary meaning, amanah also describes a
business deal where one party keeps another's funds or property in
trust. This actually the most widely used and understood application of
the term, having a long history of use in Islamic commercial law. It can
also be used to describe different financial activities such as deposit
taking, custody or goods on consignment.
Arbun: Means a down
payment. It's a non-refundable deposit paid to the seller by the buyer
upon agreeing a sale contract together with an undertaking that the sale
contract will be completed during a prearranged period.
Gharar:
This means uncertainty. It's one of three essential prohibitions in
Islamic finance (the others being riba and maysir). Gharar is a
sophisticated concept that encompasses certain types of uncertainty or
contingency in a contract. The prohibition on gharar is often used as
the grounds for criticism of conventional financial practices such as
speculation, derivatives and short selling contracts.
Islamic
financial services / Islamic banking / Islamic finance : Means financial
services that meet the specific requirements of Islamic law or Shariah.
Whilst designed to meet specific Muslim religious requirements, Islamic
banking is not restricted to Muslims. Both the customers and the
service providers can be non-Muslim as well as Muslim.
Ijara:
Means an Islamic leasing agreement. Ijarah permits the financial
institution to earn a profit by charging leasing rentals instead of
lending money and earning interest. The ijarah concept is extended to
hire and purchase agreements by Ijarah wa iqtinah.
Maysir: Means
gambling. It's another of three fundamental prohibitions in Islamic
finance (the other two being riba and gharar). The prohibition of maysir
is often used as the basis for criticism of standard financial
practices such as conventional insurance, speculation and derivative
contracts.
Mudarabah: A Mudarabah is a form of Investment
partnership. Here, capital is provided by the investor (the Rab ul Mal)
to another party (the Mudarib) in order to undertake a business or
investment activity. Profits are then shared according to pre-arranged
proportions but any loss on the investment is born exclusively by the
investor and the mudarib then loses the expected income share.
Mudarib:
The mudarib is the investment manager or entrepreneur in a mudarabah
(see above). It is this managers responsibility to invest the investor's
money in a project or portfolio in exchange for a share of the profits.
A mudarabah is essentially similar to a diversified pool of assets held
in a conventional Discretionary Managed Investment Portfolio.
Murabaha:
means purchase and resale. As opposed to lending money, the capital
provider purchases the required asset or product (for which a loan would
otherwise have been taken out) from a third party. The asset is then
resold at a higher price to the capital user. By paying this higher
price by instalments, the capital user effectively gets credit without
paying interest. (Also see tawarruq the opposite of murabaha.)
Musharaka:
This means profit and loss sharing. It's a partnership where the
profits are shared in pre-arranged proportions and any losses are shared
in proportion to each partners' capital or investment. In Musharakah,
all the partners to the commercial undertaking contribute funds and have
the right, but without the obligation, to exercise executive powers in
that undertaking. It's a similar concept to a conventional partnership
and the holding of voting stock in a limited company. Musharakah is
regarded as the purest form of Islamic financing.
Riba: This means
interest. The legal concept extends beyond interest, but in simple
terms, riba covers any return of money on money. It does not matter
whether the interest is floating or floating, simple or compounded, or
what the rate is. Riba is strictly prohibited under Islamic law..
Shariah:
This is the Islamic law as disclosed in the Quran and through the
example of Prophet Muhammad (PBUH). A Shariah product must meet all the
requirements of Islamic law. To facilitate this, a Shariah board is
usually appointed. This board or committee is usually comprised of
Islamic scholars available to the organisation for guidance and
supervision for the development of Shariah compliant products.
Shariah
adviser: Means an independent professional, usually a classically
trained Islamic legal scholar, appointed to advise an Islamic financial
organisation on the compliance of its products and services with Islamic
law, the Shariah. While some organisations consult individual Shariah
advisers, most establish a committee of Shariah advisers (often known as
a Shariah committee or Shariah board).
Shariah compliant: Means
the activity that ensures that the requirements of the Shariah, or
Islamic law are observed. The term is often used in the Islamic banking
industry as a synonym for "Islamic"- for example, Shariah compliant
financing or Shariah compliant investment.
Sukuk: This has similar
characteristics to a conventional bond. The difference is that that
they are asset backed and a sukuk represents the proportionate
beneficial ownership in the underlying asset. The asset is then leased
to the client to yield the profit on the sukuk.
Takaful: This is
Islamic insurance. Takaful plans are designed to avoid the
characteristics of conventional insurance (i.e. interest and gambling)
that are so problematical for Muslims. They structure the arrangement as
a charitable collective pool of funds based on the comcept of mutual
assistance.
Tawarruq: When used in personal finance, a customer
with a cash requirement buys something on credit on a deferred payment
basis. That customer then immediately resells the item for cash to a
third party. The customer thereby obtains cash without taking an
interest-based loan. Tawarruq is the opposite to murabahah.
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