Types of Islamic Finance
Diminishing Musharaka (Partnership)
Musharaka is partnership of two or more parties that contribute capital to a house and divide the net profit and loss proportionately. They are also entitled to participate in management, this type of contract is essentially a diminishing partnership which is acquired by the user of the property over time.
In a diminishing Musharaka the financier and the customer/purchaser start with a joint ownership of the asset, the customer share being their down payment. Since the purchaser is living in the house, the financier will rent their share of the property for an agreed amount. Also, the customer would pay extra to the bank to secure the financier share of the home over a fixed period of time. With each monthly rental payment, the customer will acquire greater share ownership in the property.
The customers will have full ownership of the property once they paid the financier their share. This type of contract can work in Australia with certain approaches.
Murabaha (Profit Arrangement)
Murabaha is a contract for a sale where the buyer and the seller agree on mark-up (profit) price on the buyer’s choice of property. The buyer repays the financier in instalments. When purchasing a home through a Murabaha transaction, the financier will purchase the house on behalf of the customer, and sell the house to the customer under a Murabaha sale contract with a profit margin, over an agreed period of time, and with an agreed number of instalments. The customer can pay off the financier early but the financier is not required to give you a profit rebate under the agreed contract.
The finance is problematic under Australian laws because Stamp Duty would be paid twice, the first Stamp Duty by the bank when it purchases the property, then the transfer between the bank and the customer. Also, the bank would be required to pay Capital Gain Tax. This contract is expensive to provide and challenging within the Australian context.
Musawamah contracts is very similar to Murabaha except the bank is not obliged to disclose the price they paid for the property. Musawamah would be difficult to implement under Australian law.
Ijarah Muntahia Bittamleek
(Lease to Own )
Ijarah Muntahia Bittamleek (lease to own) is a lease agreement with the option to own the leased asset at the end of the lease period. In the lease agreement, the rights of both parties are protected via an agreed contract that each party signs.
In an Ijarah agreement (or lease agreement), the financier purchases a property on behalf of a client and then leases it back to the client. In return, the client makes agreed rental payments with the view of taking legal ownership of the property once the payment terms have been met. During the leasing period, the client enjoys full rights and access to the property during the “ijarah” or “rental” period.
This type of finance arrangement works best in Australia since leasing, as a form of financing, has existed for more than 50 years within Australian financial institutions.