What is Shariah?

Shariah is Muslims’ legal system. It is derived from the Quran, the holy book of Islam, as well as the Sunnah and Hadith – the deeds and sayings of the Prophet Muhammad peace be upon him. Where an answer cannot be derived directly from these texts, religious scholars may give rulings as guidance on a particular topic or question.

Here at Birketts we provide shariah compliant services; Islamic finance for home purchasing (Bina Salam) and private client advice, including the drafting of shariah compliant wills and trusts (Deborah Carrivick).

Islamic Finance

Islamic finance is based on a belief that money should not have any value in itself. It is just a way to exchange products and services that do have a value.

Linked to this way of thinking about money, is the idea that you should not make money from money. This means that, wherever possible, the payment or receipt of interest should be avoided.

Another important idea that underpins Islamic finance is that it should not cause harm. For that reason, Islamic financial services should not invest in harmful activities such as alcohol, tobacco and gambling.

Islamic finance also encourages partnership. This means that, where possible, both profit and risk should be shared. This can be between two individuals, an individual and a business, or a business and a business.

Anyone can use Islamic finance products and services – you do not have to be Muslim.

What is an Islamic Mortgage and how does it work?

Islam forbids interest-bearing loans, which means that Muslims are not able to use conventional mortgages for their property purchase. Hence, many Muslim may prefer to seek a halal alternative.

There is a range of Islamic mortgage alternatives available, allowing buyers to get on the property ladder whilst being shariah-compliant. Shariah-compliant mortgages are really ‘mortgage alternatives’ and function as no-interest home purchase plans.

Though there are several variations across the market, all work in the same basic way: the bank buys the property on the client’s behalf and becomes the legal owner. The client’s monthly payments function more like rent, with a portion going towards buying out the property owner’s stake. At the end of the term, the client should either have bought the property back or have an outstanding sum left to settle before they become the legal owner.

Types of sharia mortgage

The three types of halal mortgage alternatives are:

• Ijara: In an Ijara home purchase plan, the client makes monthly payments that are part rent and part capital to finance their final purchase. This means their ownership share of the property remains consistent throughout the length of the term.
• Diminishing Musharaka: Diminishing Musharaka is a joint purchase agreement between the client and their Islamic bank. The client pays off the lender’s share in monthly instalments, so their ownership share grows as the lender’s reduces.
• Murabaha: Under the Murabaha no-interest purchase plan, the client’s sharia-compliant provider buys the property and sells it to them at a marked-up price, which they pay in monthly instalments. These kind of halal mortgage agreements are rarely seen for UK home purchases, but are sometimes used in commercial property development.

As these Islamic mortgage alternatives are all slightly different, clients should take care to consider the potential risks and advantages that may come with each, to ensure they find the most suitable product for them.

What are the risks of an Islamic mortgage?

Although, the client’s chosen bank is the legal owner of the property, the client will still need to cover the costs of insurance, general maintenance and conveyancing including stamp duty land tax (SDLT) on the initial purchase. As with a conventional mortgage, the client will need to add all of these outgoings to the costs of the purchase plan itself (though of course this applies with a conventional mortgage too).

It is also worth noting that many Islamic and halal mortgage providers will use LIBOR-pegged values to set their rent, rather than using average levels in their local area as a guide.This could work in the client’s favour, but could potentially see them paying more than they would reasonably expect to for their location.

How much deposit do you need for an Islamic mortgage?

The client will typically need a minimum of 20 per cent deposit to qualify for a halal mortgage alternative.They will also need to budget for surveys, building insurance, SDLT and any other costs, such as mortgage broker fees and legal costs.

How far has Islamic Finance come in the UK market?

Bina Salam has been working in the Islamic finance conveyancing over 18 years now and has seen many changes this sector.

HBSC Amanah was the first mainstream mortgage/finance product that was introduced in the UK and so HSBC was the first bank to offer such a product to its customers. Bina acted for the bank as their solicitors and was the head of the HSBC Amanah Team at Irwin Mitchell. As such, she faced many challenges in introducing Shariah finance into mainstream conveyancing.

Bina had to set precedents in matching the UK Law with Shariah Law. For instance, SDLT liabilities on re-finance matters. At the time, HM and Revenue did not have an alternative finance code to exempt the transfer of funds from the borrower to the bank which at first created an SDLT liability for the bank. Bina held seminars andtalks with HM and Revenue and found a solution to avoid the SDLT liability on those transactions. She is pleased to see the precedent that was set has gone on to define the Shariah finance sector for other lenders who have joined this sector in latter years.

Also, at the time, the Muslim community was not happy to accept the product as being Shariah compliant. Bina did road shows and worked with mosques and communities up and down the country and went to great lengths to explain the concept of Islamic finance and how it is compliant with the Shariah laws. Not only that, but she explained how this type of funding would work in conventional UK conveyancing. Again, she is pleased to see how the Muslim community has grown to accept Shariah financing in the UK market.

It comes as no surprise to Bina that the UK is now well-known as the main centre of Islamic finance in the West. Even though, she notes, Islamic finance has gone from strength to strength in recent years, the process still requires tweaking to be streamlined into conventional conveyancing Bina can see, however, a time, not too far ahead when such products will be much introduced by many different lenders and the process will become more smooth as a result.

Private Client

Deborah Carrivick heads up in the international private client advisory (IPCA) team at Birketts. The team have significant experience in advising Muslim clients on personal tax, succession law, Wills and estate planning.

This includes the drafting of shariah-compliant Wills, which can incorporate dispositive provisions and succession plans which comply with the succession principles of the client’s school of Islam, provisions for Islamic charitable giving (Zakat) and restrictions on the investment powers vested in executors and trustees, so that the Islamic finance principles set out above are complied with.

It is important for any UK-based Muslim, or Muslims with UK situs assets, to have a Will that is both shariah-compliant and drafted in accordance with UK law. Without a valid Will, the person’s assets will pass in accordance with the rules of intestacy, which do not reflect the Islamic succession principles.

The team can also advise on whether Wills in any other jurisdictions are needed, work with lawyers in those jurisdictions to ensure the Islamic principles are correctly incorporated and check that the various Wills sit along-side each other and do not inadvertently revoke each other.

The IPCA team can also assist in advising on shariah-compliant trusts, and drafting the appropriate Shariah provisions in the Trust Deed, as for Wills.

The team are specialists in providing UK tax advice to international clients and this includes advice on inheritance tax and the use of the spouse exemption, which will not be fully available where shariah succession principles are followed.

The team can also provide advice on the UK tax treatment of the various alternative mortgages detailed above.