House financing is among the most sought after product in Islamic banks. In order to meet the different needs and requirements of the customers, Islamic banks offer number of products with different underlying contracts depending on specific needs. Here we will discuss, how to choose the best contract that Islamic Banks can offer to help customers’ financing needs to purchase of their house. As we go through each of the products in Islamic banking, we will find the best product for the customers to choose from.
House
financing products in Islamic banks are designed using a number of
Shari'ah contracts. The contracts may include, but not limited to the
following house financing products in Islamic Banks worldwide. In this
house financing writing, we will discuss each house financing products
with the underlying contracts and why different contracts are utilized
in different financing products.
1.1 Ijarah House Financing
Ijarah
in general refers to a contractual relationship between an owner of a
property and a person who wishes to lease the asset/property. Both enter
into a lease contract or hire contract. In terms of contractual
relationship Ijarah, can be divided into: Operating Ijarah and Finance
Ijarah:
Operating
Ijarah : This Ijarah is either offered by bank or any business
organisations. Under this Ijarah, there is no purchase agreement tied to
it. It is a normal lease in which at the end of the lease period, the
asset is reverted back to the lessor or owner.
Finance
Ijarah: This type of Ijarah is normally tied to purchase or gifting.
This type of Ijarah is suitable for many purposes especially in asset
acquisition whether for personal or business uses.
a. Ijarah Muntahiah bi al Tamlik (IMBT) (Leasing ended up in ownership): This is for financing the purchase of completed asset.
b.
Ijarah Mausufah fi Dhimmah (IMFD) (Leasing ended up in ownership): This
is for financing the purchase of incomplete asset or asset that need to
be built.
Ijarah Muntahiah bi al Tamlik (IMBT)
IMBT
is a form of transfer of ownership of usufructs of some assets, such as
building or equipment, for a particular period; and in consideration
for a defined rent, which is usually higher than normal rental to
encourage the lessor to transfer the leased asset to the lessee at the
end of the lease period after the lessee has paid all instalment
/periodic rental without delay.
IMBT
has similar characteristics to the ordinary Ijarah. However, in IMBT,
it is associated with a promise or undertaking from the lessee
(Customer) to purchase the asset from the lessor (Bank) via separate
transaction at the end of the leasing contract. IMBT rental rate can
either be fixed or floating (variable rate). If it is floating, it would
normally be subject to the changes in the market rates. Nowadays,
Islamic banks prefer floating rate rather that fixed rate to mitigate
the market risk.
Among others, the IMBT agreement would include:
- The price of the leased asset/rent; and
- The lease period.
- Fixed or variable rents,
- Declining or fixed ownership,
- Operational and financial.
The
last form above indicates the status of the leased asset at the end of
the lease period. Ijarah contract used in such financing is quite
straightforward and the modus operandi is easy to understand. The bank
has to explicitly disclose to the purchaser the cost and the profit he
is going to earn from the mark-up sale in addition to the cost. The sale
may be contracted in cash basis (immediate) or on deferred payment
basis.
The figure below shows the process how Ijarah contract works!
1.2 Murabahah House Financing
Murabahah
refers to a mark-up sale in which the mark-up price is disclosed to the
buyer. The distinct feature of Murabahah which makes it different from
other sale contract is that the seller explicitly disclose to the
purchaser the cost and the profit he is going to earn from the mark-up
sale in addition to the cost. The sale may be contracted in cash basis
(immediate) or on deferred payment basis.
The following figures shows how the financing process works
1.3 Tawarruq House Financing
The
use of Tawarruq here is to generate cash for the customer to purchase
the house. Generally Tawarruq consists of sale and purchase contracts.
The sale contract involves the sale of an asset by a seller to a
purchaser on a deferred payment basis. In the purchaser contract, the
purchaser of the first sale will resell the same asset to a third party
on a cash and spot basis.Each sale and purchase contract in the tawarruq
is binding in nature and shall not be terminated unilaterally by any of
the contracting parties and the common inherent of each sale and
purchase contract in the tawarruq is the transfer of ownership of the
asset from the seller to the purchaser for a consideration.
1.4 Musharakah Mutanaqisah
Is
a contract of partnership between two or more parties in order to
finance a particular business like joint venture. All parties contribute
to the capital either in the form of cash or others. The Islamic
financial institution as a partner / financier may stipulate certain
conditions. Any profit generated from the partnership will be shared
amongst them based on the agreed profit sharing ratio (PSR). Any loss
incurred will be borne by them according to their respective capital
contribution ratio (CCR). There is no guarantee on the capital and
guarantee may only be given to cover cases of negligence and breach of
terms of the Musharakah agreement.
However,
for the case of house financing, the end goal is for the customer to
own the house. As such the product is designed using multiple contracts
to allow financing of the house where at the end of the tenure, the
customer will own the house. Musharakah Mutanaqisah was designed and
introduced to meet this need hence in Musharakah Mutanaqisah, there are 3
contracts involved; 1) Partnership (Musharakah) 2) Lease (Ijarah) 3)
Sale Contract (Bay’).
Let’s see the diagram that shows how the Musharakah Mutanaqisah financing process works.
The Islamic Consumer Financing Products:
1. The Islamic Bank Credit Card Facility
2. The Islamic Bank Personal Loan Facility
3. The Islamic Bank Automobile Financing Facility
4. The Islamic House Financing Facility
1. The Islamic Bank Credit Card Facility
2. The Islamic Bank Personal Loan Facility
3. The Islamic Bank Automobile Financing Facility
4. The Islamic House Financing Facility
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