In the developing country it is one life’s most important achievement to own a home. Because it provides the security, stability and is a great blessing in itself. Now days it is unpredictable and costly environment, saving the required money can take a life time in itself. Rising property prices, taxes, inflation, currency devaluation, it is very hard task. On the other hand owing own home by paying an easy instalments that takes the step towards complete the ownership, is so much better than paying the rent which ultimately addition in the expenses rather than the ownership of the property. By accepting the borrowing options that being a Muslim one should accept the totally Riba-Free (interest free) financing option for inner satisfaction and peace of mind, because Allah prohibited the interest for believers.
Islamic mortgage lending based on a diminishing Musharakah base, which means where bank provides the certain amount of finance to the customer and the borrower agree to a monthly payment to the bank of which a component is for the use of the home (rent), and another for customer’s equity share, as the result the monthly payment reduced regularly and customer’s share in the mortgage property grows. When the borrower made the full investment that had been agreed, then he becomes the sole owner of the property and bank removed its charge from the property. But here the point is this why the people of country are entering the interest based structure instead of interest free banking system.
In a home mortgage market there are no limits to the options. This has made it possible for almost anyone to buy, construct or renovate the home. Most people however rush headlong into the mortgage process without checking out the options. This could be because we are too busy to study the market, or would like to use the same company as people they know. At the time of entering the mortgage contract there should be study before choosing the mortgage options. There are numerous items like attractive rates, lock in periods, insurance benefits and other add-ons to sweeten the deal. It is always beneficial for the borrower to compare the various options available in the market. That’s why one will know that he/she is getting the best deal. Here the question becomes, what source of mortgage should be used and how one can glean these information.
The Shariah prohibits interest or usury, gambling and gharar (undue risk taking), involvement in trading in such goods and services that are unlawful in themselves. As such, Islamic banking products are fundamentally and conceptually different from conventional banking products, although in order to facilitate customer ease and clarity of understanding, such products often emulate the packaging and presentation of conventional banking products. This does not mean that these products are the same as those offered by conventional banks. Islamic Banks serve the same purpose to customers and the functions of Islamic banks are and will remain essentially that of financial intermediaries.
Variation in banking procedure & risk
Islamic banking is a system of finance totally based on the sharing of risk and profit, rather than on the payment of interest or the payment of predetermined rates. While in the capitalist economy the interest is the price of money when conventional banker rents / lends it. The rate of interest is determined by central bank as a result of the fiscal and monetary policy measures. Few Westerners take it seriously as a way for a modern economy to do business. In some ways, this is a mistake. In one view, the mistakes that have led Western banks and economies into their present financial troubles are precisely the errors that Islamic banking tries to avoid. Many Muslim countries have developed a variety of partnership agreements to allow lending without interest. Under such schemes, banks receive a contractual share of the profits generated by borrowing firms. Along with boosting the welfare of general public, this approach has many advantages, such as encouraging equity and discouraging debt.
Islam provides the banking system based on profit and risk sharing rather than the fixed payment of interest after a fixed interval. The Islamic financial institutions borrow and lend money on the basis of profit sharing. But in mortgages lending the Islamic banks also should have the edge over the conventional banking on account of the principle of non-interest.
In contravention financial system the rate of interest determine by the central bank. Here in Islamic banking context, it should be assumption that the welfare of general public should be kept in mind in making of loan repayment structure. In an Islamic perspective the bank should give the right to all people instead of their previous financial record. Like in case of late payment of monthly rentals of the payment of unit price the Islamic bank should charge some penalty from the borrower, and it should not be consider as the income and the cumulative amount should be spent the welfare work of the public. On the other hand the conventional banks charged the late payment charges (LPC) and treat this amount as income of the bank.
Interest free banking in practice (Detail of Lending)
Islam permits inter free banking and believe on the profit sharing both for the depositors and as well as borrowers. Especially in case of mortgages the bank create joint ownership of the property with the buyer and convert the bank’s finance amount into units by dividing the contribution of finance amount over the total months. And give the opportunity to the borrower to purchase these units within a specified period of time and against this service it charges the rent on the units which are held by the financial institution. In the other words (Islamic term) ‘Murabaha’ is the sale on profit, means cost plus profit. If a person has no funds to purchase a home or property it comes in financial institution and requests it then after checking his credit worthiness and credibility the bank and the borrower jointly purchase the property and financial institution gives the right to further purchase the units of the property into different part within specified period of time. On the other hand it is observed in the conventional banking the bank grant the loan to the borrower and he solely purchase the property and he paid the principal amount and the interest thereon.
How it could have saved us from Global Turmoil
Lets first analyze how the profit sharing system works. lets say in conventional banking the customers takes the loan at 12% per annum or for simplicity 1% per month. Now he took 100 Rs as loan , purchased some Raw material and started some production. Production took exactly one month and the final product is ready. Whats the price of the final product. Its 101 Rs. He would need to sell that at anything more than 101 to make the profit.
Lets take the same situation for Islamic banking. If the basis of lending is profit sharing, then the cost of the product still remain 100 and when sold at 102 the share is based on the pre-agreed terms.
The main reason for Global Turmoil if we remember was sub-prime mortgage lending and mortgage finance where the cost of property sky rocketed and one of the reason could be the cost of holding the property for some month increased the price of property.
For the successful Islamic banking operations, it will be on Government to implement Islamic banking. If not they should atleast provide bank status to Islamic finance institutes as they are termed right now do they can issue cheque and other such facility like banks.