The Differences Between Islamic Financing Plans

Sharia compliant Islamic financing plans can help you to buy a property or house in a method whereby you don’t pay interest. Different companies offer different products so it’s good to get some professional advice before you make any decisions.

Here’s a simple guide so you can tell the differences between different ijara transaction options and other products.

 Murabaha and Islamic Financing

This type of transaction is quite straightforward. A lender buys a home or property and then sells it to the purchaser at a slightly higher price. Factors like length of the mortgage, the value of the house or property, and the amount you put down on deposit will help determine how much you pay.

This type of Islamic financing requires a deposit at first of around 20%. However, the property belongs to the person buying it from the very first day. The payments are all fixed for the entire length of the mortgage and it’s possible to repay the loan in full without penalty.

Diminishing Musharaka

This is essentially an agreement that abides by coownership. Both the lending institution and the person buying the property have separate stakes but own the property together. That makes each payment part capital, part rent and part charges. Repayment is used to purchase the bank’s share of the house or property over time.

Share of Property

As the stake of the person buying the property grows, the lending institution’s share is reduced. This lessens the amount of rent a person needs to pay for the bank’s share of the home or property.

There’s another type of popular Islamic financing that people interested in buying a property need to know about.

Ijara and Islamic Financing

This is a popular sharia compliant home purchase plan that involves leasing. The solution that we favor is asset-based as opposed to credit based. It’s been used in the United States for two decades. We always like to tell people that it is similar to auto leases whereby a lesser/lessee  type relationship is set up.

This is an alternative to the more traditional creditor/debtor relationship. This process starts by setting up a trust. In turn, the trust leases a home or other type of property to a customer. The customer pays back a portion of the property’s price as a rent. Read all about this type of ijara transaction here.

Some of the features about Islamic financing are the same as conventional mortgages while some are different and designed to keep you away from riba.

Budget for Islamic Financing

For example, you’ll more than likely need to budget for legal fees and insurance as well as a survey. You’ll also need a deposit of at least 20% for one of these sharia compliant purchase plans.

One of the big similarities between these two types of home purchase plans is the fact you need to budget for either. Make sure to work out how much you can afford. That includes the amount you can pay each month for everything like utilities and property taxes as well as upfront costs.