Devout Muslims are not able to use traditional banks to deposit or borrow money. Under traditional Islamic law (Shari'ah law) charging interest is not permitted and wealth must be generated through legitimate trade and investment in assets. Basically the Muslim law views traditional banks as charging excessive interest and not sharing the risk with the borrower. The Shari'ah financial model on the other hand works on the basis of risk sharing so that the customer and the bank share the risk of any investment on agreed terms and divide any profit between them.
When it comes to mortgage bonds, Shari'ah compliant financial institutions offer customers two options. Under Ijara, which means rental in Arabic, the bank will buy and own your chosen property. It then sells it to you over a period of 25 years in monthly instalments for the same price. While you are buying the property over 25 years, the bank will charge you rent for living in the property (as opposed to interest). The bank therefore makes its profit from the rent it receives. Once you have paid full initial purchase price, the property will become yours.
Under the second option, Murabaha, the bank will buy the property from the seller for the original price and then sell it to you for a higher price. The higher price can be paid monthly to the bank over a period of up to 15 years. The bank therefore makes its profit from the higher sale price of the property.
According to Ebi Patel, CEO of Wesbank Islamic Finance at FNB, purchasing a house in this manner can be advantageous to non Muslim investors as well. Although the original costing is market related and will be determined by current interest rates it does allow the opportunity to fix your repayments for the length of the bond so you are not caught unaware by rising interest rates. "Our products are open to anyone of any religious denomination. Currently five percent of our customers are non Muslim" says Patel.
Although FNB will only be introducing home loans to its Shari'ah compliant offering next year, Albaraka Bank, based in Durban, offers a full banking service in line with Islamic economic principles and in compliance with Shari'ah law. Like FNB, the bank does not exclude anyone from banking with Albaraka. ABSA announced recently that it would also be introducing Shari'ah compliant products in the new year.
Article courtesy of www.ydl.co.za.
