Islamic Finance Products: Comparing Home Financing Options - FIN 370

This report provides an overview of Shariah-compliant home financing products offered by Islamic banks. It details various plans such as Ijara Muntahiyah Bi-Tamleek, Bai-Bithaman-Ajil, Musharaka, and Murabaha, explaining their mechanisms and applications. The report highlights the key differences and similarities between these financing options, offering a comparative analysis of their structures and terms. Specifically, it describes how Ijara Muntahiyah Bi-Tamleek involves a lease-to-own arrangement, Bai-Bithaman-Ajil functions as a deferred payment sale, Musharaka is a joint ownership and diminishing partnership, and Murabaha is a cost-plus financing method. The report emphasizes the importance of these products in adhering to Islamic financial principles, particularly the prohibition of interest. The analysis is supported by references to relevant academic literature and industry sources, providing a comprehensive understanding of Islamic home financing.

Running head: ISLAMIC FINANCE
Islamic finance
Name of the Student
Name of the University
Author Note

ISLAMIC FINANCE
Different Shariah compliant products offered by Islamic banks:
Some of the Shariah compliant home financing products include Ijara Muntahiyah Bi-
Tamleek, Bai-Bithaman-Ajil, Musharaka and Murabaha plans. In Ijara Muntahiyah Bi-
Tamleek which is a termination of lease with ownership. Under this plan, property is
purchased by the bank and it is leased to the borrower. When the term ends, in return for the
fixed balloon payment, property is purchased from the bank. In this plan, there do not exist
obligation on part of any parties to either sell or purchase the property. Mushsraka plan is
also known by a name of diminishing mushsraka where the property is jointly bought by the
provider and rent is paid by the borrower on a monthly basis and at the end of the term,
property would be owned by the borrower (Mahfudz et al. 2016). The less rent is paid to the
bank, the more shares are owned by the borrower. Murabaha which is better known as the
cost plus financing method, is an effective Islamic financial structure where the seller and the
buyer both come up to an agreement to cost and markup of an asset. However the mark up
comes in place of interest which is found to be illegal in the Islamic financial management.
So, it can said that Murabaha is an Islamic form of selling credits and not an interest bearing
loan. In this system of credit selling the purchaser is not authorized with the ownership of
loan unless and until it is fully paid. Murabaha is a short term Islamic financing method in
order to achieve the assets which are based on the customer’s capital for the capital. It is
mostly used by small, medium and corporate entities inclusive of all the enterprises doing
business which lies under the laws of Islam.

ISLAMIC FINANCE
Differences and similarities between the Shariah compliant home loan financing
products:
Diminishing Musharakah is a transaction that is for medium to long term. Assets are
owned by the client jointly and the partial ownership is purchased by the client. Murabaha, on
other hand is a transaction that is based on sales where the reward and risk of the assets is
borne by the banks and the assets is purchased by the bank itself. After the addition of certain
percentage of profit, asset is sold subsequently to the client. One of the most popular
technique used by Islamic bank is Bai Bitahman Ajil which is regarded as the finance lease
substitute. Under this plan, assets is purchased by the customers by making payment of
substantial amount in instalments (Subky et al. 2017). Possession of the assets is taken by the
customer or client and payment is to be made by them in the instalments for the required time
period. Ijara Muntahiyah Bi-Tamleek which is known by many other names such as ijarah wa
al-iqtina and ijarah thumma al bay'. Under this plan, the legal title of the leased assets is
transferred at the end of the lease period to the lessee. The ownership of the assets would be
surrendered by the bank at the end of the contract in return total amount of rental claim from
the client that involves the profits as well. Ijarah muntahia bi tamleek is of various forms
where the several modes of transferring the ownership of assets is reflected (Amin 2020).
From the above discussion, it is inferred that some financing plans have some factors
in common as the rental payment or the terms of contract while other plans such as Ijara
Muntahiyah Bi-Tamleek and Bai Bitahman Ajil are different.

ISLAMIC FINANCE
References list:
Amin, H., 2020. Examining the influence of factors critical for the consumer to accept the
offered Islamic home financing. Journal of Islamic Accounting and Business Research.
Mahfudz, A.A., Ahmad, N.H., Yusoff, R.M., Naim, A.M. and Ali, T., 2016. Restructuring
rental rate components to be more innovative sharia compliance product in Islamic home
financing. European Journal of Islamic Finance, (5).
Moneyadviceservice.org.uk., 2020. Sharia-law-compliant home purchase plans. [online]
Available at: https://www.moneyadviceservice.org.uk/en/articles/sharia-compliant-home-
purchase-plans [Accessed 25 Mar. 2020].
Subky, K.H.M., Liu, J.Y., Abdullah, M.M., Mokhtar, Z.F. and Faizrakhman, A., 2017. The
implication of Musharakah Mutanaqisah in Malaysian Islamic banking arena: a perspective
on legal documentation. International journal of management and applied research, 4(1),
pp.17-30.