Sharia Compliant Finance Products

Points of Esssence:

• Home Purchase Plans (HPPs) by HSBC and Lloyds offer the same protection akin to a conventional mortgage under the FSA’s regulation 2007.
• HPP employs the principle of Musyarakah Mutananaqisah (diminishing partnership) with customers being the co-owner of their property sharing any risks with the bank and every time they pay an installment it will increase their share of their property.
• A comparison was made and it proves that HPP optionsare more cehaper than conventional mortgages. Furthermore, any administration fees and how much the lender would charge for rental as part of the new plan are set clear upfront.
  
• The Libor index is used to benchmark the rental payments and all rates tend to be reviewed half yearly so rental % charges are actually the same regardless of the value, size and location of the property.

July 5th, 2008 by Len

Home Purchase Plans (HPPs) came under the FSA’s regulation as of 2007 so people with these plans do get the same protection as those who have a more conventional mortgage, it should also be said that these plans are actually open to everyone and not just Muslims.

Both HSBC (through its Islamic arm Amanah) and Lloyds TSB (Alburaq, provided by the Arab Banking Corporation and underwritten by Bristol & West), offer Sharia compliant home finance products.

HPPs are also available in the UK through the United National Bank, Ahli United Bank and Britain’s first Islamic bank; the Islamic Bank of Britain.

Due to HPP’s being based on profit but not interest payments, when choosing the right HPP plan there are no interest rates for comparison when choosing between the Islamic mortgages available on the market.

Nader Kamel at HSBC has advised that the best things to look for from your Islamic Mortgage in deciding whether it is suitable for your needs are; flexibility, the cost of taking the financing, fees, property rental options, the rent chargeable by the bank and whether you would be able to make larger lump sums during the payment period.

HSBC Amanah originally offered Ijara plans (where the bank owns the property and then transfers it to the customer at the end of the payment term) but they found that customers were too uncertain about the bank owning the property and found that the Musharaka plan was far more popular. Nader Kamel at HSBC seems to think that this is because customers feel far more confident being the co-owner of their property sharing any risks with the bank and far happier in the knowledge that each month they own an increasing share of their property.

There are some Islamic financial experts who think that these type of HPP’s work out more expensive than the more conventional mortgage, although more often there is not very much difference between them.

For example, if you bought your property for £250k with a diminishing Musharaka from HSBC Amanah with you putting down a 10% deposit meaning the bank was to buy 90% of the property, you would currently look to pay £1,553 a month.

Comparably, should you buy the same property with a conventional 2-year fixed rate mortgage with HSBC (with a 6.29% and £799 arrangement fee) you would look to pay roughly £1,655 monthly for 25 years. Should you wish to look at the HPP options make sure you are clear on any administration fees and how much the lender would charge for rental as part of the new plan.

UK Islamic finance lenders use the Libor index to benchmark the rental payments and all rates tend to be reviewed half yearly so rental % charges are actually the same regardless of the value, size and location of the property.

Understandably you will not see Islamic banks investing in organisations involved in gambling, alcohol, tobacco or pornography.