Islamic Finance : How to Understand the Home Refinancing in Islam
Islamic law takes a dim view of usury
Islamic law takes a dim view of usury. In the Islamic world, the charging or paying of interest is equated to usury. So, a conventional loan or mortgage would violate the teachings of the Koran. On the other hand, the Koran does allow money to be used in trading or investing, to generate a profit. Specifically, Islamic beliefs allow for investment based on "partnerships," in which risk and profit are shared by the parties.
Typically, under the Islamic Banking system, home loan financing is based on the principle of Profit Mark Up on the cost of the property, by mutual consent of the Bank and the Borrower. This type of financing is usually done under the contract of Murabaha.
It goes like this. Suppose you are interested in buying your dream home (who's not!). You approach the Islamic Bank with your requirements with regard to the financing. The Bank in turn would assess your requirements as well as evaluate your eligibility for the financing based on your income and repayment capacity. After taking an overall view of your financial standing and credit rating, the Bank would fix a eligible amount of home loan for you. Let us say the Bank fixes a home loan limit of USD 100,000.00 for you.
This amount would include their mark up on the cost of the property. This mark up is fixed by mutual consent. Suppose the mark up is say USD 10,000.00. That means the net amount of your home loan is USD90, 000.00. The next step for you, the borrower, is to identify your dream home in the range of USD90, 000.00. After that you give details of the property thus identified to the Bank, who in turn will negotiate with the owner of the property and make a purchase of the same specifically to sell it to you.
The next step would be to complete the formalities in regard to documentation etc., after which you get the possession of the home, though you are still not the owner of the same. The ownership will vest in you once you repay the stipulated number of installments within the repayment period fixed. Then your dream home becomes really yours!
The main characteristics of the above type of home loan under Islamic Banking are: a proper evaluation and assessment is made of the repaying capacity of the borrower and fixation of the appropriate loan amount. Another notable feature, which is in fact the bedrock of Islamic Banking, is the absence of Interest on the loan amount. Instead the Bank adds up a profit margin to the cost of the asset and divides the total amount into equal installments payable usually monthly.
Ijara and Murabha are considered by religious scholars and Islamic banks to be the most suitable methods of finance for the purchase of property in the United Kingdom.
Ijara - In the Ijara method of finance, the financier purchases the property and sells it to the customer for the same amount of money, with the payment spread over a period of time agreed between them. The customer also has to pay rent to the financier over the repayment term. The installment of the purchase is somewhat like the capital payments under a conventional loan, while the interest in the conventional loan is like the rent in the Ijara.
Murabha - In the Murabha method of finance, the financier purchases the property and immediately sells it to the customer at a higher price. The higher price is settled based on the number of years allowed by the financer to the customer to pay the purchase price. The extra sum can be compared to the interest which is charged on a conventional loan at a certain rate over the whole payment term.
Under Ijara, the bank will buy the asset you want and you will be allowed to use the asset for an agreed period in return for a monthly payment which covers the bank's capital. It is a kind of leasing.
In Musharaka (meaning partnership), the bank buys the asset and becomes the legal owner. You pay monthly installments, covering part of the rent and part of the cost of the asset, so that after a pre-determined period, you own the asset itself.
Islamic Finance : How to Understand the Home Refinancing in Islam
By: Rana Ardhita
Homemade Weed Killer Recipes How to control or create watering blooms into your watercolor painting? CCTV - DOOR ENTRY - INTRUDER ALARM - ACCESS CONTROL | INSTALLATONS Which Type of Front Door is best for Your Home? Types Of Waukesha Home Mortgage Cirhosis Treatment and Great Home Remedies for Liver Problem Adventure-filled Culinary Landscape Pacific Northwest Great Weekends All Year Round Outdoor Activiti Good Choices Of Material For Your Patio Furniture Moving from a Larger Home to a Smaller One Decorate Your Home With Latest Trends Right here's Some Simple Ways to Make Money at Home Home Job Stop Looking For Work Bad Credit Home Loans - Helps You in Your Fiscal Needs