3.1.4 Islamic finance – a growing market in the UK
When looking at ways that money can be borrowed, we also need to look at the concept of Islamic finance. Internationally this is now the fastest growing financial sector.
In the UK at the end of 2014 there were 22 firms that offered financial products that complied with Islamic Sharia Law. These included six fully fledged Islamic banks including the Bank of London and Gatehouse Bank. Collectively the firms held an estimated total of $19 billion of assets (Reuters, 2014).
To learn more about this growing market, first read the description below about how Islamic home finance works, then watch the video on the growing Islamic bond market.
Islamic home finance
Islamic home finance is based on the Islamic finance principles of Ijara (lease agreement) and Diminishing Musharaka (equity participation). You make two contracts with the bank. In this scheme, the bank and you jointly own the property, although the title deeds will be in the bank’s name. You will then buy back the bank’s share over a number of years. During that period, the bank will charge you rent for living in the property on the percentage of shares it has. With each payment, your share of the property increases, while the bank’s percentage decreases. At the end of the term, the bank will transfer the title deeds of the property into your name.
The figure below shows how the arrangement works.
Step 1 – You make an initial payment to the bank of at least 10 per cent of the property value. You sign two contracts, the Diminishing Musharaka contract and the Ijara contract. You promise to purchase the remaining 90 per cent of the property over an agreed period and you agree to pay rent to the bank.
Step 2 – The bank contributes up to 90 per cent of the property value and buys the property on your behalf.
Step 3 – The property is then transferred to you from the seller.
Step 4 – The property deeds are transferred to the bank.
Step 5 – When you have purchased the property completely, the property deeds are transferred to you.