Islamic Mortgages
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Forms of Islamic Finance
Forms of Islamic finance
There are several forms of Islamic finance, comprising Ijara, Murabaha, Mudarabah, Musharaka and Diminishing Musharaka.
Ijara
This is a type of arrangement where an Islamic bank leases equipment or a building to a customer in return for a rental payment.
The rent is a fixed sum so the bank is sure to get its investment back with profit. A variation of the agreement is Ijara wa iqtina which has the same arrangement but the agreement is to purchase. This is a popular option.
Murabaha
This is a type of agreement where a seller buys goods or commodities at the request of a buyer, then sells it back at a higher price, a mark up. The buyer can pay for it in instalments, a lump sum or a combination of the two.
Murabaha agreements are mainly used to buy cars and home but are also used to issue letters of credit and for financing import businesses.
Mudarabah
This is like a business partnership between a capital provider and an entrepreneur. Any profits are shared proportionately by mutual agreement, but any losses are borne by the owner of the capital, leaving the entrepreneur with nothing for their effort.
Musharaka
This is a classic partnership agreement where all partners contribute the capital to finance the business. Profits are paid to all partners based on a pre-agreed ratio and losses are shared based on each partner’s share of the business.
Diminishing Musharaka
This is where profits are shared on a pro rata basis. However this also lets the bank reduce its ownership of any project with each payment that is made to it. Ultimately the asset is transferred to the participant.
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