Islamic Home Finance
History Of Islamic Home Finance
Islamic Home Finance has been available in Australia since the late 1980s. However, as Islamic finance was not a mainstream form of lending, in the past there were many challenges associated with obtaining funding, developing Islamic contracts and distributing these products to the Islamic community via a third-party channel.
Since its early introduction into the Australian market, Islamic home finance has steadily grown with increasing demand driving additional funders to enter the market. This in turn has led to increased choice and products for consumers. At Sharia Finance, we consider this a good thing for consumers as it has helped put the power back into their hands.
Today, Islamic home finance has grown from a niche product available in limited parts of Australia, to an established industry that now caters for the Australian Islamic community. There are funders in most Australian states who offer a variety of different Islamic contracts to help finance your home purchase. Most of these funders have been reviewed by Islamic boards to ensure that the contracts they use are sharia compliant.
How Does Islamic Finance In Australia Work?
Are There Different Types Of Islamic Finance Agreements?
There are multiple Islamic Funders in Australia. Most of these funders use a type of Islamic contract known as an Ijarah Contract. These contracts are a type of rent-to-buy contract. In these contracts the funder will purchase a property and then will charge rent for an agreed term with additional payments to progressively buy back the ownership from the funder. At the end of the contract, the funder will discharge their interest in the property to ensure that you are the unencumbered owner of the property. No interest is paid with an Ijarah contract
There multiple types of Ijarah agreements and each agreement stipulates the terms of the lease, what is required and how ownership of the property will be transferred. Below you will find a list of the most common forms of these agreements. Please note that not all of these are available in Australia.
Ijarah Muntahia Bittamleek (Rent To Buy)
This is a form of rental agreement where a funder will finance a property and you will pay agreed rental instalments to the funder. These rental instalments can be either fixed or variable and will occur over an agreed rental period. In addition to paying rent for the portion of the property you do not own, you will also make additional payments to buy back the ownership from the funder. At the end of the lease period, you have the option to buy the property from the funder. The amount the funder sells the property for at the end of the agreement is typically a couple of hundred dollars as your have fulfilled your rental agreement.
Ijarah wa-iqtina (Rent with gift)
This is a form of rental agreement where a funder will finance an asset and you will pay agreed rental instalments to the funder. These rental instalments can be either fixed or variable and will occur over an agreed lease period. The difference between Ijarah Muntahia Bittamleek and Ijarah wa-iqtina is that with the latter, at the time of purchase – the funder signs a separate agreement to ‘gift’ the asset at the end of the rental period rather than to sell it to the client.
Ijarah Mawsufah Fi Al Dhimmah (Forward Ijarah)
This form of leasing agreement involves selling a property that is currently being constructed for a future delivery date. With this type of payment, the financer will make the payments during the construction period with the rental repayments by the client only starting after the completion of construction. This is not a very common form of financing
Are there other contracts except Ijarah Contracts?
Diminishing Musharakah
Diminishing Musharakah is a type of finance contract where there is a ‘co-ownership structure’ of the asset. The funder and the borrower jointly purchase an asset together. When this occurs, the funder acts as an investor or entrepreneur and financially backs the client to buy a property. The funder will take a percentage ownership in the property proportionate to the amount that they finance. With this type of agreement, the purchaser will buy back the units of the property that is owner by their investor. By doing this, the funder acts as an investor and jointly owns the asset and slowly sells it back to them over a pre-agreed period.
How Does Sharia Finance Help?
It can be difficult to navigate Islamic home finance in Australia. At Sharia Finance, our team of Islamic specialists have significant experience helping our clients around Australia to successfully apply for Islamic home finance. Our team support you every step of the way including discussions about different Islamic funders and their contracts, negotiating with the funder on your behalf and managing the application all the way until the funds are paid. If you would like to speak with us about your personal circumstances, simply give us a call or request a call using our online booking platform.
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