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Sharia-compliant mortgages

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X-Ray production team X-Ray production team | 14:43 UK time, Friday, 19 March 2010

This week X-Ray looks at a different type of mortgage - one governed by Islamic principals but available to everyone: the Sharia-compliant mortgage.

Islamic or Sharia law is a set of principles derived from the Qur'an, the holy book of the Muslim faith.


Photograph of a Cardiff mosque

A Cardiff mosque

These principles can affect every aspect of how Muslims choose to live their lives, including how they approach financial transactions.

The most important of these principles are:

  • No interest must be paid or received.
  • Everybody participating in a financial transaction must be adequately informed and not cheated or misled.
  • Investment is forbidden in what are considered to be socially detrimental activities - such as gambling, alcohol, armaments or pornography.
  • The investor and investee must share the risk of all financial transactions.

(source: The development of Islamic finance in the UK: the Government's perspective. HM Treasury. Dec 2008)

As of 2008 the UK topped the league table of Western countries with Sharia-compliant assets (valued at over $18 billion) and ranked eighth worldwide.

What is a Sharia mortgage?

The basic difference between a Sharia-compliant mortgage and a conventional mortgage is the relationship between the buyer and the lender. 

Akmal Hanuk, chief executive of the Cardiff-based Islamic Banking & Finance Centre, explains: "In an Islamic finance home loan, you normally have a partnership together, and this is based on a no-interest basis. 


Akmal Hanuk, chief executive of the Cardiff-based Islamic Banking & Finance Centre

Akmal Hanuk, chief executive of the Cardiff-based Islamic Banking & Finance Centre

"The second important aspect is that all the conditions, the rights and obligations are spelt out upfront. There are no hidden charges, there is no small print. Everything is absolutely upfront - an agreement is reached right at the time of signing the contract."

At the moment there are three kinds of Sharia-compliant home financing products in the market: 

  • Ijara - Where the buyer essentially rents a property monthly from the lender and also pays agreed monthly repayments. Once the purchase price is paid in full the property is transferred to the borrower.
  • The diminishing Musharaka - Where the buyer enters into a shared partnership with the lender in which both jointly buy the property. The money paid back by the buyer consists of a capital payment plus rent which every month increases the buyer's share.
  • Murahaba - Where the buyer is required to finance a percentage (typically up to 20 per cent) of the property upfront. Repayments are agreed and fixed for the term of the mortgage - a maximum of 15 years. The loan can be repaid in full at any point without penalty. The house immediately belongs to the buyer.

The most popular of the three in the UK is the diminishing Musharaka.

Case Study
Dr Ahmad Jamal, a lecturer at Cardiff University, says being able to take out a Sharia mortgage with a High Street bank in 2002 was a great relief.

"I felt extremely happy, extremely delighted," he said, "and relieved as well, because once you buy a product that is in compliance with your faith I think it gives you a great deal of pleasure."

Does Dr Jamal think they could appeal to non-Muslims?

"Absolutely, yes," he says. "A Sharia-compliant mortgage would give them peace of mind that they are doing something that is purely ethical."

What are the benefits of a Sharia-compliant mortgage compared to a conventional one?

According to Akmal Hanuk, the biggest advantage of a Sharia compliant mortgage is that it is based on human values.

"The world is looking for an alternate system, which is based on understanding the values of the human beings," says Mr Hanuk.

"If there are people who genuinely cannot pay their mortgages, they are not just put on to the street because this agreement is in partnership with the bank.

"The human aspect is the most important in Islamic finance."

Are Sharia-compliant mortgages catching on among non-Muslims?

Sharia-compliant mortgages became available in the UK in 2002. Over recent years more and more Sharia-compliant mortgages and other financial products have been coming onto the UK market. 

Many are now offered by banks as well as specialist Islamic finance providers.

"Islamic finance is growing at an exponential rate of almost 20 per cent a year all around the world," says Mr Hanuk, whose company provides training to banks and advisors about Islamic finance.

"And it is primarily due to its financial principles, its ethical value.

"The recent figures of a number of banks in the Far East, as well as few in the UK, are showing that the non-Muslims are also approaching this sector very confidently and very openly."

As the popularity of Sharia finance has grown, so has the protection for customers. Islamic mortgages are now regulated by the FSA just like any other mortgage.

Would you consider taking out a Sharia compliant mortgage? Do you like the idea of an ethical and transparent mortgage arrangement? Let us know below.



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