According to Standard & Poor’s, Islamic banking has grown steadily at a rate of 10% in the last decade, a global meltdown and numerous economic swings notwithstanding, and it is fore-casted that this trend will continue and even improve in the coming years. Standard & Poor’s have also estimated that Sharia-compliant assets all over the world were worth a whopping $400 billion in 2009 and are projected to reach $4 trillion within a couple of years. The immense success of Islamic banking methods and the widespread popularity of Sharia-compliant mortgages has prompted scholars and financial analysts to delve into the reasons. But before trying to understand what makes Sharia-compliant mortgages so successful, it is worthwhile to gain a fair knowledge about the Sharia laws that govern Islamic banking methods.
Sharia Laws that Govern Islamic Financing
Islamic financing principles are based on the guidelines laid down by the Sharia, a body of law that is based on the teachings of the Holy Qur’an and the sayings of Prophet Muhammad. While formulating the Islamic financing principles, early scholars were prompted by considerations of justice and partnership; this is easy to gauge from a closer study of the rules. Sharia-compliant mortgages are based on the following laws:
- Wealth must be produced only by engaging legally in trade and asset-based investment.
- All financial investments involved in Sharia-compliant mortgages should be ethical in nature and serve the greater good of the society.
- Risks should be shared by all parties who have entered into a financial agreement.
- The financial agreement should not involve harmful activities.
The rules of the Sharia also lay down strict guidelines as to what should be prohibited while carrying out the financial transactions and all Sharia-compliant mortgages have to abide by these. The following are prohibited by the Sharia:
- Using money to generate money
- Charging and receiving interest. According to scholars, these are tantamount to defying the principles of justice, partnership, and risk sharing. However, Sharia-compliant mortgages allow the lender to earn money by sharing the profits earned from an asset’s performance or through fees received for the services provided to the customer.
- Investing in businesses that involve gambling, alcohol, drugs, pornography, or anything that the Sharia considers as unlawful or immoral
- Transactions that involve speculating or entering into extremely risky ventures
- Financial contracts with unspecified, vague, or ambiguous terms, conditions, rights, and obligations, or with hidden charges
All About Sharia-Compliant Mortgages
The popularity of Sharia-compliant mortgages arises from the fact that all these financing methods are safe, ethical, easy-to-understand, and easy to carry out. The common Sharia-compliant mortgages such as ijara, Musharaka, and Murabaha are hailed as much for their integrity as for their adherence to fundamental Islamic codes of conduct.
The ijara form of financing is one of the most popular of all Sharia-compliant mortgages. An ijara is a leasing contract wherein a bank or any other Islamic financial institution leases out the right to use an asset or a piece of property to a lessee in return for a fixed amount of rental payment that the latter will tender at pre-determined intervals. In some forms of ijara, the right of ownership of the asset or the property is transferred to the lessee at the end of the leasing period. Sharia-compliant mortgages like the no-interest and extremely transparent ijara find widespread application in the real estate market.
The Musharaka or the Diminishing Musharaka form of Islamic mortgage is also another widely prevalent type of Sharia-compliant mortgages, especially in the home financing products market. In this form of agreement, the buyer enters into a partnership with the lender to jointly purchase a property. At fixed intervals of time, the buyer pays a certain sum of money, consisting of capital payment plus a rental amount, to the lender. This payment corresponds to a share in the ownership of the property. Subsequent payments increase the buyer’s share in the property and there eventually comes a time when the lender no longer has any stake in the property and the right of ownership thus becomes transferred to the buyer.
In the Murabaha form of Islamic mortgage, the buyer has to provide a certain percentage of the funds to buy an asset or a piece of property. The contract specifies the amount of rental payment and the period of the mortgage. The buyer can however repay the loan in full anytime he wishes and thus instantly secure the right of ownership of the asset or the property.
Same Underlining Theme
The above is only an essence of how these three forms of Islamic mortgages function. But it is clear that although these three forms of Sharia-compliant mortgages differ in their modus operandi, they all are essentially true to Islamic religious principles.