When it comes to finance, and in particular buying property, Muslims are faced with a religious dilemma. Under Sharia Islamic law, making money from money, such as charging interest is not permitted. This is because one party would gain at the expense of another without regard to the value of goods traded – a concept that conflicts with the Islamic principle of equality.

Wealth should be generated only through legitimate trade and investment in assets. Investment in companies involved with alcohol, gambling, tobacco and pornography is strictly off limits The overriding principle of Islamic finance is that all forms of interest are forbidden, however, Sharia law does allow the sharing of risk and profit.

Sharia, or Muslim mortgages have been developed to allow Muslims to raise the finance to buy property without compromising religious principles. There are currently two types of arrangement available:

Ljara
With the Ljara method, the bank buys the client’s chosen property. The bank or building society then sells on the property to the client for the same price under a ‘promise to purchase’ agreement. The arrangement for repayment may be spread over a term of up to 25 years. The client will occupy the property under a lease during the repayment term whilst making a capital repayment and combined rent for the lease. The bank is still the registered owner of the property during the repayment term. At the end of the repayment term the property is transferred to the client.Under Sharia law, the rent payment is seen as a fair price for using the property and therefore with the Ljara method, there is no conflict of principle.

Murabaha
With the murabaha method, the bank buys the property at an agreed price and then sells it immediately to the client for a higher price. The price is dependent on the repayment term, which can be up to 15 years. The deposit takes the form of an initial payment, typically around 20%of the property value. The client then makes fixed monthly payments to the bank during the agreed term. One difference to the Ljara method is that as the property is transferred to the client initially, it then becomes registered in his name rather than that of the banks. The Murabaha tends to be less popular than the Ljara as it is more expensive and less flexible in the terms of its early repayment. With respect to Sharia compliant investment; the customer and bank share the risk of any investment on agreed terms, and divide any profits between them.

The main categories within Islamic finance are: Ljara, Ijara-wa-iqtina, Mudaraba, Murabaha and Musharaka. As already mentioned the Ljara method is a leasing agreement whereby the bank buys an item for a customer and then leases it back over a specific period. Ijara-wa-Iqtina is a similar arrangement to that of the Ljara, except that the customer is able to buy the item at the end of the contract. Mudaraba offers specialist investment by a financial expert in which the bank and the customer shares any profits. As already mentioned, the Murabaha method is a form of credit which enables customers to make a purchase without having to take out an interest bearing loan. The bank buys an item and then sells it on to the customer on a deferred basis. Musharaka is an investment partnership in which profit sharing terms are agreed in advance, and losses are pegged to the amount invested. Nearly all the traditional banking services are now available in the high street banks in a Sharia compliant format .