The ABC’s of This Islamic Finance Process
Ijara-wa-Iqtina is the Sharia template that encompasses the term Ijara which itself means renting to own. This is a sharia compliant process that can be implemented for not just property but equipment too. Once you start looking into what’s required, you’ll see how simple the Islamic financing procedure is.
Here’s a brief overview.
A Trust is the first step. This is the Islamic Finance structure that first buys the property and leases it to their customer. The idea is a segment of every monthly payment moves the customer towards 100% ownership.
There is one big difference when we are comparing Sharia Ijarah-wal-iqtinah Islamic loans and the ones that are more conventional. This difference hinges on the fact that Trust must sell the real estate under what’s commonly referred to as a Promise to Purchase to the customer.
The customer has no legal responsibility to buy the property.
A Few Notes on IJARA Monthly Payments
There’s a few things that people want to know when they approach us about these loans. For example, the original amount is financed through Islamic sharia compliant methods and makes money for the investor. This is through the monthly rental payments.
However, there is no issue with Sharia compliance and the way these payments are calculated. It’s important to remember that any IJARA product is calculated based on reverse amortization. This allows the profit to be to be described as a percentage. Therefore, it is acceptable as far as Sharia compliance goes.
There’s a good example on this page. Get there by following this link.
The Purchase Price Explained
This idea is simple once you unpack it. The purchase price is the number that’s agreed to in the Promise to Purchase. The formula is straightforward. It equals the original purchase numbers subtract the customer’s down payment plus one dollar .
You’ll find an example by following the link above and scrolling down to “How The Purchase Price of The IJARA Transaction is Determined” there.
Your Rights
One of the other things that people ask about quite often is whether they will be considered a homeowner or tenant under an Ijara Islamic finance transaction. The answer isn’t as clear-cut as you might think at first. Although you sign a lease to make certain rent payments, your agreement isn’t like more traditional arrangements.
Basically, you can do many of the same things that a more traditional homeowner does. You are responsible for a variety of things including the maintenance of the home. You can decorate remodel as you see fit. However, you can’t change the structure or the outlying buildings without replacing them with something of equal value.
Finally, gains or losses on the property are distributed in an equal manner as per Sharia compliance. Everything is distributed as per percentage of ownership. Follow this link to the appropriate section and you’ll be able to get a full understanding of the principles involved.