In the Name of God, the Merciful, the Compassionate.
Islamic finance is very important in two significant ways; first, it whips up the element of inclusiveness. For example, a skilled farmer who has no means of production can enter into a salam (spot payment and delivery of agricultural goods later) contract with the Islamic bank or any party who is willing to partner with the farmer and offer a means of production so that the community may benefit from the skills of such a farmer.
In other words, people who hitherto wouldn’t have had access to banking and financial services yet are skilled, have been automatically covered by the Islamic finance system to enable them to contribute their quota to society.
Secondly, Islamic finance effectively controls inflation, (i.e. the supply of money and supply of goods) in the market because it is asset-backed.
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Hence, Islamic finance is a grounded financial system. The inclusiveness element of Islamic finance is beginning to play an imperative role in the global mortgage financial business.
In the USA for example, acquiring interest-free mortgages are done through interest-free bond security (sukuk). The first ever in the history of the United States was issued with Fannie Mae in 2002.
Conventional mortgages chiefly involve the lending of a capital sum to a borrower who will then repay the amount borrowed plus a fixed or fluctuating interest rate, over an agreed period of time.
On completion of a property purchase with a conventional mortgage, the ownership of the property would pass directly from a seller to a buyer, with the lender’s charge being noted on the title of the property until the repayment of a loan is completed.
On the other hand, diminishing Musharakah is the main mode of financing fixed assets by Islamic banks. It includes house financing, auto financing, plant and machinery financing, factory, building financing and all other fixed asset financing. Our attention will be on house/home financing.
Diminishing Musharakah Financing is an alternative finance product developed to comply with Islamic finance principles known as the Sharia. One of the key principles is the prohibition of Riba (interest), which is the generation of income or profit by charging interest.
Lenders offering diminishing musharakah financing have their own Islamic Advisory Committees, which consist of Islamic Scholars that advise on how their products could be designed to best meet the principles of Sharia.
Diminishing Musharakah applies the principles of co-ownership, and is generally structured in a way that the Financial Institution contributes towards the purchase price of a property as a co-owner, rather than a lender, and effectively co-owns a property with the buyer on completion.
The equitable shares in the property are proportionate to the amount of capital contributed between the financial institution and the buyer. A diminishing musharakah (ie. a diminishing co-ownership) agreement would be entered into between the financial institution and the buyer regulating the split of beneficial interest in the Property between them.
The legal title of the Property is owned by the financial institution on completion of a purchase, and a lease is created between the financial institution and the buyer under which the financial institution charges the buyer rent on its share of the property. As such, the financial institution does not earn any interest and rather collects its income from the profit generated by rent.
The buyer effectively makes repayments to the financial institution on two separate elements over a period of time in order to acquire a complete beneficial interest in the property.
Firstly, acquisition payments to buy the financial institution’s share of beneficial ownership, which is fixed at the same price as the financial institution’s initial contribution to the purchase price.
Secondly, rental payments under the lease in respect of the financial institution’s proportion of beneficial interest in the property. These two contracts of repayments must be separate from each other as per the shariah, lest it renders the whole contract ‘batil’ (invalid)
A buyer’s equitable share would increase as they make their Acquisition payments and the rental payments will accordingly adjust throughout the term. The financial institution would transfer the legal title of the property into the buyer’s name when the buyer has completed their acquisition payments and as a result, there would be no further rental payments required at this point as the lease would come to an end.
Musharakah Mutanaqisah has proven to be one of the best alternatives through which one can own a roof over their head.
Experiences gathered from the Middle East and North Africa (MENA) region, Malaysia, Indonesia Pakistan etc. has in fact shown the way forward as far as a shariah-compliant mortgage is concerned.
May Allah accept this from us all and let this knowledge be beneficial to the youth of this country. And Allah knows best.
Source: YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and an advocate in Ghana.
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