Islamic Mortgages: How Do They Work
The trend of Islamic finance is broadening the home ownership base predominantly among the Muslims. It is an ethical mode of finance which derives its roots from the Quraan. As per the Islamic law, usury based business transactions are considered immoral. The fundamental belief is that all kinds of interest based transactions are unfair since they provide profit only to the lender without any assurance to the borrower. Sharia also includes prohibitions from investing in areas such as breweries, casinos, defense and armaments.
Although these principles have been mandated in the seventeenth century when Islam was established, Islamic banking has been formalized progressively since the late 1960s. Islamic mortgage is a socially responsible investment which makes no demarcation between the spiritual and the secular. Islamic law views money as a measurement tool for value and not an asset in itself. It believes that one should not be able to receive income from money alone. As a consequence, two types of mortgages have evolved that are compatible with the Islamic law. The common type of Islamic loan is the Murabaha transaction. In this transaction, the bank does not give money to the buyer to purchase the home rather it buys the home itself and then re-sells it to the buyer at a higher cost. The buyer pays a fairly large down payment and gets the ownership of the home right away. Murabaha transaction scheme is applicable to all kinds of goods along with homes and real estates.
Another type of Sharia mortgage is Ijara which is common among Islamic banking organizations in the West. Unlike the Murabaha plan, in this scheme, the home will remain in the bank's name until the whole amount is paid off. The buyer will make payments to the bank on the purchase price and can take up the residence immediately. However, in addition to the payments, the buyer also needs to pay a fair market rent. At the end of the term, the buyer will acquire the full ownership of the home.
The Islamic financing market, in general is predicted by many analysts to have extensive growth rate over the coming years. Islamic law views money as a measurement tool for value and not an asset in itself. It believes that one should not be able to receive income from money alone. As a consequence, two types of mortgages have evolved that are compatible with the Islamic law. The common type of Islamic loan is the Murabaha transaction. In this transaction, the bank does not give money to the buyer to purchase the home rather it buys the home itself and then re-sells it to the buyer at a higher cost. The buyer pays a fairly large down payment and gets the ownership of the home right away. Murabaha transaction scheme is applicable to all kinds of goods along with homes and real estates.
Although these principles have been mandated in the seventeenth century when Islam was established, Islamic banking has been formalized progressively since the late 1960s. Islamic mortgage is a socially responsible investment which makes no demarcation between the spiritual and the secular. Islamic law views money as a measurement tool for value and not an asset in itself. It believes that one should not be able to receive income from money alone. As a consequence, two types of mortgages have evolved that are compatible with the Islamic law. The common type of Islamic loan is the Murabaha transaction. In this transaction, the bank does not give money to the buyer to purchase the home rather it buys the home itself and then re-sells it to the buyer at a higher cost. The buyer pays a fairly large down payment and gets the ownership of the home right away. Murabaha transaction scheme is applicable to all kinds of goods along with homes and real estates.
Another type of Sharia mortgage is Ijara which is common among Islamic banking organizations in the West. Unlike the Murabaha plan, in this scheme, the home will remain in the bank's name until the whole amount is paid off. The buyer will make payments to the bank on the purchase price and can take up the residence immediately. However, in addition to the payments, the buyer also needs to pay a fair market rent. At the end of the term, the buyer will acquire the full ownership of the home.
The Islamic financing market, in general is predicted by many analysts to have extensive growth rate over the coming years. Islamic law views money as a measurement tool for value and not an asset in itself. It believes that one should not be able to receive income from money alone. As a consequence, two types of mortgages have evolved that are compatible with the Islamic law. The common type of Islamic loan is the Murabaha transaction. In this transaction, the bank does not give money to the buyer to purchase the home rather it buys the home itself and then re-sells it to the buyer at a higher cost. The buyer pays a fairly large down payment and gets the ownership of the home right away. Murabaha transaction scheme is applicable to all kinds of goods along with homes and real estates.
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