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Wednesday, April 11, 2007

Philippine Islamic Mortgages | Shariah



Shariah is the term used to describe Islamic law. Riba ( interest ) - the abolition of interest, is a religious goal and value that the Islamic economic system is based on. Historically, the issue of Riba combined with limited availability of Halal mortgage options has prevented numerous Muslims from purchasing homes without compromising their beliefs. Conventional mortgage loans are interest-bearing, in conflict with Islamic Principles, and therefore Haram (prohibited) by Shariah. This has presented difficulties for the finance industry and created barriers to homeownership for our Philippine Muslims brothers. Filipino Muslims can purchase homes or refinance existing mortgages using faith-based options. Halal mortgages are structured differently than conventional interest bearing mortgages, so they are Shariah compliant and are inline with Islamic principles.

The two most common forms of Shariah compliant home purchase finance are Ijara and Musharaka. According to practitioners of Islamic banking and scholars, these methods are the most suitable means for purchasing property in the Philippines via The Al-Amanah Islamic Investment Bank, currently the only Islamic Bank in the Philippines. Both Ijara and Musharaka are long established Islamic financing principles.

Ijara is based on a “lease-to-own” concept and is interest-free making it compliant with the Riba provision of Shariah. In an Ijara based transaction, you identify the property you wish to buy and agree to the purchase price with the seller. The bank enters into a “Promise to Purchase” agreement with you for an amount equal to the original purchase price and purchases the property. At the same time, you enter into a lease agreement with the bank which details your rights to occupy the property. You make monthly payments to the bank and a portion of the payment is applied toward the purchase of the property with the remainder paid to the bank as rent. Once the purchase price is paid in full, rental payments cease and ownership of the property is transferred to you.

Musharaka is based on a “shared ownership” concept. In a Musharaka based mortgage transaction, you identify the property you wish to buy and agree to a purchase price with the seller. The bank buys the property and leases it to you (similiar to Ijara). Your first payment is your initial contribution (deposit), in a Musharaka arrangement this amount will become your initial `Share` of the property. As the mortgage term progresses, the capital portion of your monthly repayment to the bank will add to your percentage share of the property. When you make your last payment at the end of the mortgage term, you would have purchased 100% share of your home.

Using the Islamic Finance concepts of Ijara or Musharaka, you now have a choice of faith-based mortgage options enabling you to purchase a home or refinance a conventional mortgage through a Halal mortgage which is Riba free and; therefore, Shariah compliant

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