Benefits of Building a Trust for Your Finances

When Muslims and other people interested in buying a home or getting involved with other legal matters want to do things according to Sharia law, they look to a trust to make sure their manner of Islamic finance deal is free of Riba.

Understanding all about this legal tool as it pertains to an Islamic loan is a good practice. Here’s a brief overview of what you’ll need to know about a trust before you get involved with one.

First and foremost, a trust is a powerful legal tool that establishes the rights and obligations among the parties involved. It sets the parameters for the beneficiaries, settlers and trustees. There are various reasons for people to need this vehicle—some wealthy people use trusts to their advantage while others use them to care for people with special needs, and still others find them of use to protect assets from creditors and even safeguard your assets for future generations. Other people use this vehicle to ensure their Islamic finance transactions stay in accordance with Sharia law by staying away from Riba.

In a nutshell, the purpose of a trust is to establish a legal entity that will have control over assets and finances. These work well combined with Sharia law by providing a framework for Muslims to buy property without borrowing money from big lending institutions and paying interest on the loan amount itself.

When it comes to Islamic finance as it pertains to these laws, Sharia law is made up of a few different principles derived from a variety of sources including the Qu’ran, the Hadith and Fatwas. There are different interpretations over some areas, but most scholars agree that the charging of interest on a loan is something that is in contravention of these laws and should be avoided.

Hence an Islamic loan has found one of the solutions is using a trust to avoid the payment of interest on the money borrowed directly. Under this process, an individual trust holds title to the property and the technique is called Lease to Purchase” (Ijara wa Iqtina).

Under this type of Islamic finance, a form of interest free financing is created that upholds Sharia law while still working within a more traditional Western framework. This program using a trust is often the perfect solution for Muslims that want to follow the tenets of their beliefs while living in areas that are non-Sharia law jurisdictions.

For more information see What is a Trust