Islamic Home Loans: What Are Sharia Compliant Home Loans?

9 June 2017
Islamic finance is quite different to the Australian financial system, which means the process for applying for a home loan is different for Muslims living in Australia.

According to the 2011 census, the Muslim population in Australia was approximately 476,000 at the time, accounting for 2% of the population (ABS). This number has undoubtedly grown since then, which means there are thousands of Islamic Australians seeking finance that abide by the Sharia laws.

How does Islamic finance work?

There are 3 core principles of Islamic finance that make it different to the standard Australian home loans:

The core principle of Islamic finance is that one must work for profits, and that money itself cannot earn more money. For this reason, Sharia law prohibits interest being charged on home loans, which is a core principle of property finance. This means there is a different process for Muslims to get a home loan that is in line with their religious beliefs.

Instead of charging interest on home loans, a bank must provide some service to earn its profits, I accordance with Sharia law. Islamic banks provide accounts that typically purchase assets with your money in order to generate returns.

High degrees of risk are also prohibited under Islamic finance, and all possible risks must be identified to investors clearly.

The third and final core principle of Islamic finance is only ethical causes or projects can be invested in, ruling out anything such as weapons, adult entertainment or gambling. This causes Islamic banks to be socially responsible, something that some Australian banks can definitely improve in.

 Related Article : What is ethical investing or socially responsible investing? 

What are Islamic home loans?

Where a standard Australian home loan would finance the property purchase through funds from the lender which is repaid via interest, Islamic home loans take a different approach.

Islamic home loans involve the Islamic home loan provider buying a property from the seller (another bank), then selling it to a buyer. The transfer ownership of the home to the buyer is made through a promissory gift, known as a hiba.

This is just one type of Islamic home loan. There are several different types, which we’ll discuss below. To see the different types of standard Australian home loans to learn how they are different, read this article.

 Related Article : The Different Types of Home Loans 

Types of Islamic home loans

Islamic home loans can be divided into 5 basic types:

  1. Murabaha: The bank will buy the property for you and will sell it back at a profit. You pay fixed monthly repayments without paying any interest back.
  2. Mudarabah: One partner lends to money to another so they can invest in a property, and each partner shares a responsibility in the loan.
  3. Ijara: The bank buys the property and leases it to you, transferring ownership to you once the loan term ends.
  4. Musharaka: You and the lender buy the property together and you gradually buy the bank out of its share. The more shares you own the less you have to pay the bank.
  5. Wakala: The bank becomes your agent, allowing them to use your money to invest in sharia compliant trading activities.

Does Canstar compare Islamic home loans?

No, at the time of writing, Canstar does not specifically research rate Islamic home loans. However, you may be able to compare the home loans market using the Canstar website so that you have a better idea of what is on offer when you approach an Islamic home loans lender.

And of course, if you are not Islamic and are eligible to apply for a standard Australian home loan, then you can compare and apply for home loans directly using the Canstar website:

Who provides Islamic home loans?

Given the scope and competitive nature of the Australian home loan market, there are limited Sharia compliant Islamic home loans on the market.

The major institutions in Australia at the time of writing that offer Islamic home loans designed to be Sharia compliant include:

  • Iskan Finance
  • Amanah Islamic finance
  • MCCA Islamic Finance and Investments
  • ICFAL (Islamic Cooperative Finance Australia)

These are the major players in the field, and you can expect a few more to spring up in the coming years.

In addition, some of Australia’s major banks such as Westpac and NAB, introduced Sharia compliant home loan products to the market some years ago. Australia also has more than 20 approved foreign banks that offer a limited range of Islamic financial products.

We are not recommending that you rush off to get a loan from any of the providers mentioned in this article. This is simply an example of some of the institutions in Australia that offer Sharia compliant home loans.

Always check the product disclosure statement (PDS) and key facts sheet for any home loan that you are considering. Always check that an Islamic home loans provider is verified by the MFAA (Mortgage and Finance Association of Australia) and that they have an Australian credit licence.

Can a non-Muslim apply for an Islamic home loan?

This depends on the provider you choose. Stricter Islamic finance institutions only provide their services to Muslims, and will even go as far as to request additional documents regarding your faith before moving forward with the loan.

There are some, however, who are actively seeking to lend to more non-Muslim clients to add to their customer base. There are no legal restrictions under the Australian law on non-Muslims taking out Sharia compliant home loans, but there would be no financial benefit.

Australian residents or citizens looking for a non-Islamic home loan should check our Choosing A Home Loan Checklist and compare home loans using the Canstar website:

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