For some Muslims, conventional financial services are unacceptable because some of the practices involved are against Shari’ah law. For instance, Shari’ah does not allow earning or payment of interest, which means that for Muslims, getting a bank account, taking out a loan or buying a property can all be challenging. There can also be issues around how money is invested when it is paid into the bank. Muslims are forbidden to invest money into companies which deal in alcohol, gambling, tobacco or pornographic material, so require a bank account which will guarantee their money is not used to fund companies involved in these industries.
Islamic financial services have been set up in response to these difficulties, to cater for the specific needs of the Muslim community. As these products become more common, with many high street banks now offering Islamic banking, they can also appeal to people of any religion concerned about how their money may be invested.
There are several specialist and high street banks which now offer Shari’ah compliant accounts. These tend not to offer interest or overdraft facilities and guarantee that your money will not be invested in any companies dealing in alcohol, gambling, tobacco, pork products or pornographic material. Other than this they function as any other bank account. For more information on Islamic banking, visit the Institute of Islamic Banking and Insurance website here.
When buying a home, it is necessary for most people to take out a mortgage. This can present difficulties for those who wish to keep to the principles of Shari’ah law, as the interest charged on a conventional mortgage may be regarded as unacceptable, however there seems little alternative if you are keen to buy your own home. Islamic financing can offer a solution in the form of Halal mortgages.
There are a number of different ways in which these can work, which are briefly outlined below:
- Murabaha – This is a form of financing where once you have chosen the property you would like to buy the bank will purchase it on your behalf. They will then sell it on to you over a set period of time at an agreed price which allows them a profit margin on the original price of the property. You will make monthly payments towards this total amount until the balance is cleared, at which point the property will be transferred into your name.
- Ijara – This is based on a ‘lease to own’ concept. Again you identify the property you wish to buy, and the bank will then make the purchase. You enter into a lease agreement with the bank which details your right to live in the property. Each month you will have to make a payment to the bank – part of this will go towards clearing the debt you owe and part will be paid to the bank as rent in exchange for them allowing you to living in the property. Once you have paid off the balance of the debt the property will be transferred into your name and rental payments will stop.
- Diminishing Musharaka – Somewhat similar to Ijara, this form of financing works on a shared ownership basis. The bank purchases the property of your choice jointly with you, and leases their share back to you. Each month you make a payment to the bank which buys you a share of the property and includes a rental payment in exchange for use of the rest of the property. As with Ijara, once you have bought the entire property from the bank it will be transferred into your name and you will no longer have to pay rent.
Insurance may also be an issue for some Muslims; although it is not expressly against Shari’ah Law in the way that charging interest may be considered to be. Some have argued that conventional insurance policies contain gharar (because if a claim is not made one party may end up with all the profit or premium, while the other party gets nothing), maysir (gambling and insurance may be seen to be interrelated because the policyholder pays a small amount hoping to receive a large payout in the event that they make a claim) and riba (because the insurance company is likely to invest the policyholder’s money in bonds etc which may contain elements of riba) due to the way they operate.
Takaful or Islamic insurance works slightly differently in order to avoid these difficulties. Policyholders pay into a collective fund, which can then be distributed to those who need it. Each individual contributes a different amount depending on the cover they need. There are no shareholders, and no profit is made from the fund. Losses are divided amongst the community, and if there is any surplus after paying out for claims made and making sure there is sufficient money in the fund to support future claims, this belongs to the policy holders. It may be repaid as a dividend, or as a reduction on the amount paid into the policy in future.
For more information on any aspect of Takaful, you can go to the Institute of Islamic Banking and Insurance website here.