Islamic & Shariah Finance Solicitors

No. Islamic banking is for all individuals regardless of their religious beliefs. Many non-Muslims have recognised that although Islamic Finance may not be something which is mandatory within their faith and belief- a choice of having an alternative to the standard interest-bearing system offered by conventional lenders- is something which has become intriguing and of interest to them.

The most important difference between Islamic and conventional banking is that Islamic banking must follow the Shariah. Islamic banking must also avoid activities such as riba’ or gharar (excessive uncertainty). For example, instead of charging interest on financing given out, Islamic banks give financing based on Musyarakah (Partnership Agreement) and will share any profit and loss.

Islamic Finance or Shariah compliant mortgages are structured so that the person who wishes to purchase / refinance / remortgage –  the property pays no interest but the banks still make money by charging their customer’s rent as opposed to interest. It might be argued that charging rent or making a profit is no different to charging interest, in that ultimately the providers still make money.  It is how that money is made that is the underlying difference between Islamic mortgages and conventional ones. So instead of making money through interest, banks will make money through profit or through rent when the bank owns the property as an asset.

The finance products offered by the Banks are usually based on one of these instruments:

• Musharaka (also known as ‘diminishing Musharaka’) – The Bank will buy the property and grant you a lease for the period of the financial term of the Mortgage. A Trust is created between you and the Bank. With each payment your share in the property will increase until you have bought all the shares in the property. The Bank will then transfer the legal title into your name. This is the most popular form of Islamic finance and is utilised readily by Al Rayan Bank PLC and Gatehouse Bank PLC.
• Ijara – The Bank will buy the property and grant you a lease for a term. Once the lease period is completed the Bank transfers the legal title of your new home to you.
• Murabaha – The Bank will buy the property and will sell it back to you on a deferred basis. (Cost-plus financing) This is a contract sale between the bank and its client for the sale of goods at a price which includes a profit margin agreed by both parties. As a financing technique, it involves the purchase of goods by the bank as requested by its client. The goods are sold to the client with a mark-up. Repayment, usually in instalments is specified in the contract.
• Bai Salam – Bai Salam is a form of forward contract when the price for an asset is paid upfront at the time of the contract for an asset or commodity to be delivered later. it can also be defined as the sale where the Asset/Commodity is delivered on a deferred basis in exchange for the Price be paid immediately. This is different from the idea of Murabaha where the Price is paid of deferred basis but Asset is delivered immediately.
• Mudarabah – This is an agreement made between two parties: one which provides ‘100 percent of the capital’ for the project and another party known as a ‘Mudarib’ who using his entrepreneurial skills, manages the project. Profits arising from the project are distributed according to a predetermined ratio. Any losses accruing are borne by the provider of capital. The provider of capital has no control over the management of the project.

Simply, ‘Riba’ is interest. Any amount, big or small, over the principal, in a contract of loan or debt is ‘Riba’ prohibited by the Holy Quran, regardless of whether the loan is taken for the purpose of consumption or for some production activity.

The justification behind the prohibition of interest in Islam suggests an economic system where all forms of misuse (“neither wrong nor be wronged”) are eliminated. In particular, Islam wishes to establish justice between the financier and the individual or corporate body taking the finance: the financier should not be assured of a positive return without doing any work or sharing in the risk, while the individual or corporate body, in spite of his management and hard work, is not assured of such a positive return.

The mechanism of Islamic Finance can be defined as a contract “to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him.” In other words, the most popular form of Islamic Finance is comparable to a conventional leasing mode of financing. You pay rent for the use of the property, instead of paying interest on the loan amount. Bank purchases the property either from the Seller, or customer in the case of refinance, and then lease it to the customer over an agreed term.

The distinguishing feature of this mode is that the assets remain the property of the Bank. Over the term of the finance, the Bank become landlord and the customer assume the role of tenant. The Shariah allows earning profit through renting out of fixed assets provided that the lessor bears all the ownership related risks attributable to those assets.

Majority of the Bank’s offering Islamic Finance in the United Kingdom have been given the green light in being ‘halal’ (permissible) by Scholars who are independent to the Banks’ itself. Examples will include the two major Bank’s providing Islamic Finance at present namely- Al Rayan Bank PLC and Gatehouse Bank PLC. Al Rayan Bank is overseen by an independent Sharia Supervisory Committee (SSC) on which sit highly experienced and world-renowned scholars with decades of experience in Sharia and financial law.   Every product offered by the Bank is fully approved by the SSC. Gatehouse’s Shariah Supervisory Board (SSB) comprises of individual Shariah experts who are independent from the bank, but are active in overseeing its operations. The SSB reviews transaction documentation and other contractual obligations entered into by Gatehouse including standard terms of employment and insurance arrangements. The SSB is formally appointed by the Board of Directors, pursuant to the delegated authority of, and reporting directly to, the Bank’s shareholders.