Sharia or Islamic mortgages comply with Islamic law, which prohibits paying or receiving interest. Instead, they use profit-sharing or lease-to-own agreements. The bank buys the property and either leases it to the borrower or sells it at a profit over time. This ethical financing option ensures compliance with religious principles while facilitating homeownership.
Definition and popularity
Home Purchase Plans (HPPs) are Sharia-compliant financing options for buying a property, preferred by Muslims who wish to avoid interest-based transactions. They are an alternative to traditional mortgages and have gained popularity worldwide among Muslims seeking homeownership.
Partnership structure
HPPs involve a partnership between the buyer and the financing provider. The provider purchases the property and sells it to the buyer at a higher price, which is paid back by the buyer over a specified period.
Payment structure
The buyer makes regular payments to the financing provider, covering both the principal amount and a share of the property’s ownership. As payments progress, the buyer’s ownership share increases. Once payments are complete, the buyer becomes the sole owner of the property.
Profit mechanism
The financing provider’s profit in HPPs comes from selling the property at a higher price than its purchase cost. The higher price reflects the time value of money and the provider’s ownership share in the property. HPPs do not involve interest charges, aligning them with Sharia principles.
Ownership share and flexibility
The buyer’s share of ownership is determined at the time of purchase and increases with each payment. Additionally, buyers have the option to purchase additional shares to increase their ownership over time. This feature is beneficial for buyers who cannot afford to buy the property outright.
Availability and property types
HPPs are available for both residential and commercial properties. Financing providers may also offer property management services if requested. However, buyers are responsible for property maintenance and expenses related to repairs or upgrades.
Conclusion
HPPs provide a Sharia-compliant financing option for property purchase without interest-based transactions. They involve a partnership structure where the buyer gradually increases their ownership share through regular payments. HPPs are particularly appealing to those who want to own a property but cannot afford an outright purchase.