PART-B

Q-7: MURAD wishes to contract a loan with a bank to get mortgage to buy a house. He
is aware that there are restriction under Islamic law but that there is a contract that could
help him bypass those restrictions.

Answer:

Inform MURAD of the restrictions and of the licensing contract that allows him to circumvent
them. If Murad wanted to mortgage the house while adhering to Islamic principles, he might
consider another form of financing, Islamic or Sharia-compliant. Islamic finance is based on the
principles of avoidance of interest (riba) and promotion of risk-sharing and profit-sharing. A
common home equity contract in Islamic finance is the Musharakah Mutanaqisah contract, also
known as a diminishing partnership or diminishing musharakah. Under this contract, the bank
and the borrower enter into a partnership to jointly purchase the property. The bank provides part
of the funding and the borrower provides the remainder. The borrower then pays the bank
monthly installments consisting of two parts: the rent and the progressively acquired bank's share
of the property. As the borrower makes these payments over time, the bank's ownership interest
decreases and the borrower's interest increases until the borrower becomes the sole owner of the
property. It is important to note that the details of Musharakah Mutanaqisah contracts and other
Islamic financing arrangements may vary by bank and jurisdiction. Murad should consult an
Islamic finance professional or a representative of a bank offering Islamic financial products to
understand the terms, conditions and enforceability of such contracts. Ultimately, Murad should
scrutinize the contract and consult a professional to make sure it meets his religious beliefs and
financial needs before signing an agreement.
Under Islamic law, certain restrictions and principles must be followed when financing a home
purchase. The main restriction is the prohibition of interest (Riba). Islamic law considers
interest-bearing loans to be exploitative and unjust. Therefore, traditional interest-bearing
mortgages are not allowed.
In keeping with Islamic principles, Murad may consider the following contract options:
Musharakah:

Musharakah is a partnership contract used in Islamic finance, including home finance. This is a
form of joint ownership where the bank and the buyer (in this case Murad) jointly contribute to
the purchase of the property. Under the Musharakah contract, the bank and Murad share
ownership of the property. Here's how Musharakah works in the context of home financing:
Partnership: The bank and Murad entered into a partnership agreement in which they provided
the financing for the purchase of the property. For example, the bank could provide 70% of the
funding, with Murad contributing the remaining 30%.
Ownership Share: Ownership of the property will be divided between the bank and Murad
according to their respective contributions. For example, the bank has a 70% ownership interest
and Murad has a 30% ownership interest.
Occupancy: Murad lives in the property and pays the bank a monthly payment consisting of two
parts:
a. Rent: A portion of the payment is used as rent for the bank's ownership interest in the
property. This is similar to paying rent to a landlord.
b. Buyout: The remainder is used to gradually acquire the bank's ownership interest in the
property. Over time, as Murad makes these payments, his ownership interest increases and the
bank's interest decreases.
Transition to Sole Ownership: As Murad continues to make payments, his ownership interest
increases and the bank's interest decreases. Ultimately, Murad will acquire the full ownership
interest in the bank, thereby becoming the sole owner of the property.
Ijara:
Ijara is a lease contract commonly used in Islamic finance, including home finance. This is a
form of hire purchase agreement in which the bank buys a property and leases it to the buyer (in
this case Murad) for a period of time. The Ijara contract allows Murad to eventually take title to
the property. Here's how Ijara works in the context of home financing:
Property Purchase: The bank bought the property on Murad's behalf with its own funds. The
bank becomes the legal owner of the property.
Lease Agreement: The bank leased the property to Murad for a predetermined period. The lease
agreement specifies the rent amount, lease term and all other applicable conditions.
Rental Payments: Murad pays rent to the bank monthly on agreed terms. The rent amount is
usually based on the market value of the property and is reviewed periodically.
Rent-to-Own: A portion of the rent paid by Murad is called a "hire purchase payment". This
means that a portion of each rent goes towards the subsequent purchase of the property.
Transfer of Ownership: At the end of the lease, Murad has the option to buy the property from
the bank for a nominal sum, or to transfer it to him as a gift. The transfer of title constitutes the
completion of the Ijara contract and Murad becomes the full owner of the property.
Murabaha:

Murabaha is a type of contract used in Islamic finance that allows the purchase of goods,
including real estate, in a manner consistent with Islamic principles. This is a cost plus financing
where the bank helps the buyer (Murad) acquire the property without charging interest.Here's
how Murabaha works in the context of home financing:
Property Selection: Murad identified the property he wanted to buy. The bank appraises the
property and negotiates the purchase price with the seller.
Purchase by the Bank: The bank buys the property from the seller with its own funds. The bank
becomes the legal owner of the property.
Sale to the Buyer: The bank then sold the property to Murad for a higher price, which included
the original purchase price plus an agreed profit margin. This margin serves as the bank's gain
from the transaction.
Deferred Payment: Murad and the bank agree on a payment plan and the total fee will be paid
in installments. These installments are paid by Murad over a period of time.
Ownership Transfer: Once Murad completes all installments, title to the property passes to him
and he becomes the legal owner.
Murabaha allowed Murad to buy the property with deferred payments, including the bank's
profits, without interest (riba). It provides an alternative financing option that complies with
Islamic principles.