Similar to conventional home loans, the payment for a property is made by the client in installments after it is bought by the Islamic bank and either sold or leased. The difference lies in the absence of interest and the application of partnership, mark-up sale and leasing structures.
Types of Arrangements
Diminishing Musharaka (Musharaka Mutanaqisa)
It refers to a partnership where one partner makes a promise to gradually purchase the equity share of the other partner at market value or an agreed-upon price at the time of sale.
Following the formation of the partnership, the buying and selling of equity shares take place. The buying and selling agreement is independent of the partnership contract and the buying partner is not allowed to give a promise to buy.
Mark-Up Sale (Murabaha)
It refers to the sale of a commodity at a disclosed cost-plus-profit price. The markup can either be a percentage of the selling price or a lump sum amount and the sale price cannot be changed.
The contract can be concluded without a prior promise (Ordinary Murabaha) or with a prior promise (Murabaha to Purchase Orderor/Banking Murabaha).
Islamic Lease (Ijarah/ijarah Muntahiya Bittamleek)
It refers to leasing a property and its usufruct for a specific period of time in return for an agreed consideration.
Ijarah Muntahiya Bittamleek: The ownership of the leased property is transferred to the lessee at the end of the lease term or at any time the lessee wishes to acquire the leased asset.The Islamic Bank may purchase the property either from the same lessee or the market. When the property is ready, the contract is signed. In the case of property under construction, an Ijarah Mowsufa Fil Dhimmah contract is signed.
Manufacturing Finance (Istisna/parallel Istisna)
It refers to the sale of specified items to be manufactured/constructed which must be delivered by the seller (San’e) to the buyer (Mustasne) when completed.
Parallel Istisna: Two contracts are involved. In the first contract, the Islamic Bank acts as the seller and establishes the contract with the buyer. In the second contract, the bank acts as the buyer and established the contract with a seller to perform its obligations towards the first contract. The difference in prices between the two contracts results in a profit.