Singapore (13 October 2020) – In the first part of our series on “Education – Does Interest Free Home Financing Facility Exist?” https://www.halaluniverse.net/personal-finance/education-does-interest-free-home-financing-facility-exist/ we mentioned that it is incumbent upon Muslims to be aware of non-interest based home financing models and how they work given that they are not allowed to pay and consume interest, unless in “darurat” situations.
We highlighted three basic home financing methods namely:
- Diminishing Partnership (Musharakah Mutanaqisah)
- Commodity Cost-Plus Trade (Commodity Murabaha, Tawarruq)
- Lease-to-Purchase (Ijarah Muntahiyyah Bittamlik)
In this second of our three-part series, we will be looking at some of the interest-free financing mortgages available in four non-Muslim countries – Australia, Canada, the UK and the US. It is interesting to note that while the Diminishing Partnership is becoming less popular amongst service providers in Malaysia – reflected by the lesser number of banks providing such financing structure – it seems to be the most popular mode of financing in the countries we highlighted below.
Our final article, Insha Allah, will attempt to look at the practicality of adopting these financing models in Singapore’s unique housing market.
Australia
Australia is today home to more than 600,000 Muslims of diverse backgrounds, up more than 15% from the previous census, according to the Australian Census of 2016. Notwithstanding that Muslims are a minority in the continent, Australia’s Islamic finance and banking sector is growing in leaps and bounds. It will culminate next year with the opening of its very own deposit-taking Islamic bank – the Islamic Bank of Australia – to be headquartered in Sydney.
A quick Google search under “Shariah Home Financing Australia” yields a long list of institutions providing Shariah home financing facilities in Australia. Australian banks such as Westpac and National Bank of Australia have also jumped onto the bandwagon and are providing Shariah-compliant banking and finance products.
We shall highlight two Australian cooperatives that offer two different home financing models. The MCCA or the Muslim Cooperative Community of Australia, which offers the Lease-to-Own or Ijarah Muntahiyya Bittamlik model and ICFAL, or the Islamic Cooperative Finance Australia, which offers Diminishing Partnership or Musharakah Mutanaqisah financing structure.
The Muslim Cooperative Community of Australia (MCCA)
The MCCA started in Melbourne in 1989 with AUD 20,000 and a vision to address the financial, banking and investment needs of the Australian Muslim community by offering Shariah-compliant housing finance products. By December 2015, the cooperative hit a significant milestone of AUD 1 billion in home and commercial property financing. (1)
Under the MCCA’s Ijarah Muntahiyyah Bittamlik model – or lease arrangement that ends in ownership – a client is appointed as a “wakeel” Arabic word for “representative” of the MCCA, once he meets the criteria for funding and is issued with a conditional letter of funding approval.
As a representative of the MCCA, he will identify the property he wishes to lease-to-own for the cooperative to buy. He then promises to lease-to-own the property from the financier. The client is considered to have entered into a lease arrangement with the financier, which details the client’s rights to occupy the property.
Once the property is purchased, the client will make ongoing periodic lease rental payments. The client may choose to purchase the property from the financier at any time during the agreement period by paying the financier’s outstanding amount on the property, which represents the financier’s ownership in the property. The financier will transfer the property title over to the client in the form of a promissory gift or hiba in Arabic.
If the client chooses to maintain the lease arrangement throughout the whole period, the financier will transfer the property title over to the client in the form of a promissory gift or hiba, upon receipt of the last payment. (2)
Islamic Cooperative Finance Australia (ICFAL)
ICFAL, or Islamic Cooperative Finance Australia, was set up in 1998 by a group of volunteers. It offers property financing, vehicle financing and benevolent loan (Qard Hasan). Today it employs five staff, and has more than 3200 members with over AUD 34 million in Member Share Fund. In FY 2018/19 it distributed AUD 4.25 per share net profit to members. (3)
ICFAL’s property financing called SER – Share and Equity Rental – is a “trading” structure based on the Musharakah Mutanaqisah or Diminishing Partnership principle.
ICFAL will first assess potential returns on a said property investment – namely net rental income and potential long-term capital gains — before agreeing to partner a client. If the investment is found to be unviable, the investment will be avoided. Once it has agreed to partner a client, ICFAL will bear its share in any “natural and unavoidable losses” in compliance with the Shariah.
How it works
ICFAL and the applicant member will co-own a property on a shared equity basis – which is called musharakah (partnership). The member contributes 20% and ICFAL 80% of the property value at the time of purchase. Legitimate costs including stamp duty are included. The title of the property is registered in the name of the member who intends to be the final owner. (4)
As a security, the member mortgages the property to ICFAL. The member purchases ICFAL’s equity over a term period – the musharakah units – and becomes the full owner at the end of the period. This makes the process called diminishing partnership.
A profit based on agreed property value growth is pre-set for each unit sale of ICFAL equity, which normally occurs monthly. The member may be entitled to purchase additional equities at pre-set “ICFAL balance unit target sale price” shown in the contract.
In addition, a member pays weekly rental for the portion of the property he doesn’t own. The rental payments are pre-set based on the rental in the market and a rental growth rate, the latter takes into account changes in rental over time due to inflation or rental trends in the region concerned.
During the co-ownership, both parties share the actual fixed costs of ownership such as council rates, fixed service fees, mandatory insurance and strata fees. Thus the net rent paid is the rental minus the refund of the fixed costs.
The member’s actual payment of a month therefore is the sum of the member’s purchase of the musharakah units, rental of ICFAL’s share of the property and the in-built profits on ICFAL’s musharakah units.
Next – Canada’s An Nur Cooperative
There are more than 1 million Muslims in Canada today with two-thirds of them living in two cities – Toronto and Montreal. (4) Like in Australia, the Muslims in Canada are of diverse background and Islam is the fastest growing religion in the country. According to the Gulf Times, the Muslims in Canada are young, middle class and well educated with good grasp of financial literacy. (5)
Again like in Australia, there is also a sizable number of Shariah-compliant home financing providers. An Nur Cooperative Corporation, based in Ontario, offers both the Diminishing Partnership and Cost-Plus Murabaha alternative financing models, the latter only in certain exceptional situations.
An Nur’s Diminishing Partnership is similar to Australia’s ICFAL’s home financing model, with one exception. Unlike ICFAL’s, An Nur Coop does not share in any of the price appreciation of a property it co-owns.
Under An Nur’s Home Purchase Plan, or HPP, a homebuyer contributes a minimum of 25% of the value of the home he wishes to buy. There is no limit to the purchase price. As a form of security, An Nur places a lien registered on the title of the house. The 75% balance of the house is payable in monthly installments. Titles to all housing units are held in the name of a Numbered Ontario Corporation for security purposes.
A monthly “User Fee” is payable to the Numbered Company as a return for its investment in the house determined by the current rental value of the area; the dividend An Nur Coop pays its investors; the average return on An Nur’s investments and other factors as determined by the management.
The United Kingdom – Importance of Financial Inclusion
The number of Muslims in the United Kingdom is estimated to have surpassed more than 3 million today. It is not surprising that amongst the western countries, the UK has one of the most developed Islamic finance and banking infrastructure, given that it has been one of the leading voices in the development of Islamic Finance for over 30 years. (6)
“Many people ask us why the UK has shown this commitment, for so long, especially given that we are not a predominantly Muslim country. It’s because we are committed to two principles.
Firstly, we believe that financial inclusion is really important to help economies grow, and to bring prosperity to individuals. Financial inclusion means providing bank account and basic services to individuals. It also includes offering opportunities for investors to put their money to good use. The second principle is that we believe that people shouldn’t have to compromise their values when they do business,” Robin Ord-Smith, MVO, said in 2015, when he was British Ambassador to Kyrgysztan. (7)
An amendment to the UK tax laws more than a decade ago, specifically the passing of the Finance Act 2003 in the Parliament, led to the mushrooming of Shariah-compliant home financing, according to Millbank LLP. The law removed the burden of having to pay two charges of stamp duty on a Shariah-home financing.
“Under Ijarah and Diminishing Partnership structures, there are effectively two sales of the property being financed; the first when the bank buys the property from the vendor and the second when the homeowner completes repayment of the financing and buys the property from the bank. Each of these purchase transactions gave rise to a charge to stamp duty land tax, which would make the Islamic mortgage prohibitively expensive.” (8)
We’ll highlight two Shariah-compliant housing facilities both provided by Islamic banks – the Gatehouse Bank and the Al Rayyan Bank.
Gatehouse Bank – Seeing Huge Demand for Product Since Launch
Gatehouse Bank launched its Home Purchasing Plan (HPP) in December 2018. According to the bank, it is seeing “huge demand” for the plans coming from both Muslims and non-Muslims.
Gatehouse Bank’s HPP is a typical Diminishing Partnership model where the buyer and the bank purchase the house. The bank charges rent on the part of the property that the customer doesn’t own. The buyer also pays an additional amount each month to gradually purchase the bank’s share of the property over a set period. (9)
This Diminishing Partnership home financing model is also offered by Al Rayan Bank, which claims to offer the widest range of Islamic mortgage alternatives. In addition to the Diminishing Partnership model called HPP, it also offers BTLPP or Buy to Let Purchase Plans.
Similarly, Al Rayan would partner a customer in the purchase of a house. The latter will then make monthly payments, including payments for use of the share of the property the bank owns. This increases the customer’s equity in the house every month. The customer will own fully the property at the end of the financing term.
In the wake of the pandemic, Al Rayan recently announced it has re-introduced its 90% or 95% Fund-to-Value financing to assist customers, meaning a homebuyer needed to only place a 5% to 10% deposit to purchase a home. (10)
The United States
Islam is the third largest faith in the US, after Christianity and Judaism. A 2017 Study estimated that there were 3.45 million Muslims of diverse backgrounds in the US, making up 1.1% of the country’s population. Pew Research Study estimated that at the current accelerated rate of growth, the number of Muslims will likely more than double in 2050 to estimated 8.1 million, surpassing Jews as the second largest religious group. (11)
Shariah-compliant home financing has a long history in the US. Among the well-known providers of the service are Guidance Residential and Lariba American Finance House founded by Dr Yahia Abdul Rahman, the Father of Islamic Finance in the US.
Guidance Residential financing model “Declining Balance Co-Ownership Program” as its name implies is based on the diminishing partnership contract. Established in 1999, Guidance Residential has processed USD 2.3 billion worth of Islamic financing since the year 2002. It claims to have 70% of the market share in the US. (12)
Similarly Lariba American Finance House’s model is based on the concept “Declining Participation in Usufruct.” A property like a car, a house or a commercial building has two rights of ownership – the ownership of the title and the other is the right to use the property. (13)
Lariba will also partner its client to the purchase of property. The client becomes the owner of the title of the property while Lariba retains the share in the usufruct. The value of the sale will be paid in monthly instalments over a period of time up to 30 years. As the client makes monthly payments, this progressively reduces Lariba’s share in the usufruct and increases the client’s share to reach 100% at the end of the financing period. -/- www.halaluniverse.net
References:
- http://www.mcca.com.au
- https://www.mcca.com.au/how-it-works
- https://icfal.com.au
4)https://icfal.com.au/home-finance-3/
5)https://nurcoop.com
6)https://assets.publishing.service.gov.uk/government/uploads/system/uploads/
attachment_data/file/503491/2015047_Is_Fin_A5_AW_ENG_WEB.pdf
7) ibid
8) https://www.lexocology.com/library/detail.aspx?g=03c35288-0cc1-4284-9330- 3ec540bd446d
9) https://gatehousebank.com/insights/a-guide-to-how-shariah-compliant-mortgages-work
10) https://www.alrayanbank.co.uk/home-finance/hpp-uk-residents
12) www.guidanceresidential.com
13) https://www.lariba.com/sitephp/index.php
