If two million Muslims in the UK want a mortgage or a loan, they face a moral choice. Conventional mortgages and loans all have to be paid back with interest, which is forbidden by the Koran. Interest is called "riba" in Islamic law, and it is a form of usury.
More and more, British financial institutions are making special arrangements to meet the needs of Muslims that are in line with what the Koran says. Here are two examples:
Ijara with decreasing Musharaka is an alternative to a mortgage.
Ijara is getting less Musharaka is an Islamic alternative to a traditional UK mortgage that has been taken up by a number of British banks and building societies.
Musharaka means "partnership" at its core. Under this Islamic way of handling money, the bank buys the house and becomes the legal owner of it. Then, for the agreed-upon time, say 25 years, a payment is made every month. Each monthly payment includes a rent payment and a payment that buys a small piece of the house. It's kind of like a variable shared equity plan, since the buyer's share of the house steadily goes up as payments are made. When the last payment is made, the house is yours for good. Ijara
Here, you tell the bank or financial institution what you want, like a car, and they buy it. The bank lets you use the asset for an agreed-upon amount of time in exchange for a monthly payment that covers the cost of the bank's capital. In fact, it is a type of renting.
The UK doesn't have a lot of Islamic finance, so where can you find it? The following are three ideas:
Lloyds TSB has added Islamic products to 33 of its branches over the past few years. Their spokesman tells us, "It's important that our customers can see that we're doing things the right way. There is a group of four experts on Islam who look over the products. They give advice about Islamic law and check the goods ".
HSBC, which is also a big bank, is making a special line of Islamic products under the brand name Amanah. This range includes plans for home loans, home insurance, business loans, and different current accounts and pensions. Hussam Sultan, who is in charge of the Amanah product, says, "As a bank, we are not here to preach or tell our customers that Amanah finance is the way to please Allah. We're just here to provide them with a choice".
There are three branches of the Islamic Bank of Britain in London, two in Birmingham, and one each in Leicester and Manchester. They are the only British bank that specifically serves Muslim customers and says that everything they do is halal. Their Sharia'a Supervisory Committee, which is made up of Muslim scholars who are experts in all parts of Islamic finance, has to approve all of their financial products.
For your information, here are the meanings of some words that are often used to talk about Islamic finance.
A list of Islamic words that are used in finance.
Amanah means trustworthiness, which includes being loyal and being honest. As a main secondary meaning, amanah also refers to a business deal in which one party holds the money or property of another party in trust. This is the most common and well-known way to use the word, as it has been used for a long time in Islamic commercial law. It can also be used to talk about different kinds of financial transactions, like taking deposits, keeping goods in custody, or sending goods on consignment.
Arbun: It means a deposit. It's a non-refundable deposit that the buyer gives to the seller when they agree to a sale contract and promise to finish the sale contract within a certain amount of time.
Gharar: This means that I don't know. It's one of the three most important things that Islamic finance doesn't allow (the others being riba and maysir). Gharar is a complex idea that includes different kinds of uncertainty or possible outcomes in a contract. People often use the fact that gharar is illegal as a reason to criticise common financial practises like speculation, derivatives, and short selling contracts.
Islamic financial services, Islamic banking, and Islamic finance are all terms for financial services that meet the specific rules of Shariah, which is the name for the law that governs Islam. Islamic banking was made to meet the religious needs of Muslims, but it is not only for Muslims. Both the customers and the people who provide the services can be Muslim or not.
Ijara is the Arabic word for an Islamic lease agreement. Ijarah lets the bank make money by charging rental fees for leasing instead of lending money and earning interest. Ijarah wa Iqtinah takes the idea of ijarah and applies it to agreements to rent or buy.
Maysir: Means gambling. It's one of the three main things that Islamic finance says you can't do (the other two being riba and gharar). People often use the fact that maysir is against the law as a reason to criticise common financial practises like traditional insurance, speculation, and derivative contracts.
Mudarabah: A Mudarabah is a type of partnership for investing. Here, the investor (the Rab ul Mal) gives money to another person (the Mudarib) so that they can start a business or invest in something. Then, profits are split up according to what was agreed upon ahead of time, but if the investment loses money, the investor has to pay for it all, and the mudarib loses the expected income share.
Mudarib: In a mudarabah, the mudarib is the person in charge of investments or the business owner (see above). The manager's job is to put the investors' money into a project or portfolio in exchange for a cut of the profits. A mudarabah is similar to a traditional Discretionary Managed Investment Portfolio in that it is made up of a group of different assets.
Murabaha is Arabic for "buy and sell." Instead of lending money, the capital provider buys the needed asset or product from a third party. In the past, a loan would have been needed to buy this asset or product. The asset is then sold to the capital user for more money. By paying this higher price in instalments, the person who wants to use the capital gets credit without having to pay interest. (See tawarruq, which is the opposite of murabaha, for more.)
Musharaka: This word means sharing both profits and losses. It's a business relationship in which the partners agree ahead of time how much of the profits each will get and how much of the losses each will take. In Musharakah, all of the business partners put money into the business and have the right, but not the obligation, to run it. It's the same idea as a regular partnership or owning voting shares in a limited company. Musharakah is thought to be the most Islamic way to finance something.
This word means interest, Riba. Riba is a legal term that means more than just interest. In simple terms, it means any return of money on money. It doesn't matter if the interest is simple or compounded, if it is simple or if it is floating. It also doesn't matter what the rate is. Under Islamic law, there are no exceptions to this rule.
Shariah: This is Islamic law as written in the Quran and shown by Prophet Muhammad (PBUH). All of the rules of Islamic law must be met by a Shariah product. Usually, a Shariah board is set up to help with this. Most of the time, this board or committee is made up of Islamic scholars who can help the organisation develop products that are in line with Shariah.
Shariah adviser: An independent professional, usually a classically trained Islamic legal scholar, who is hired by an Islamic financial organisation to help make sure that its products and services are in line with Islamic law, or Shariah. Some organisations talk to Shariah advisers one at a time, but most set up a committee of Shariah advisers (often known as a Shariah committee or Shariah board).
Shariah-compliant refers to an action that makes sure the rules of Islamic law, or Shariah, are followed. In the field of Islamic banking, the word "Shariah" is often used as a synonym for "Islamic." For example, "Shariah-compliant financing" or "Shariah-compliant investment" are both ways to say "Islamic."
Sukuk: This is like a traditional bond in a lot of ways. The difference is that sukuk are backed by assets, and each one shows how much of the underlying asset is owned by the holder. The client then rents the asset, which brings in the profit from the sukuk.
Takaful is the word for insurance in Islam. Takaful plans are made so that they don't have the things that Muslims don't like about regular insurance, like interest and gambling. They set up the deal as a charitable group pool of funds based on the idea of helping each other.
When used in personal finance, Tawarruq means that a customer who needs cash buys something on credit and puts off paying for it. The customer then sells the item right away to someone else for cash. So, the customer gets cash without taking out a loan with interest. The opposite of murabahah is called tawarruq.
