The growing popularity of Islamic finance and their nature of being asset-back investments have made it a popular choice for home financing for both Muslim and non-Muslim property buyers, particularly in the Gulf Cooperation Council countries. In the recent past, the Islamic finance industry has caught up rapidly and has been working on developing products that challenge conventional home loans in terms of product characteristics and flexibility – and, of course, the ethical aspect.
In Qatar, meanwhile all four Islamic banks - namely Barwa Bank, Masraf Al Rayan, Qatar Islamic Bank and Qatar International Islamic Bank - are offering a variety of Shariah-compliant home loans for nationals and expats.
“Islamic banks are already at par with their conventional counterparts in terms of products, flexibility and penetration. Since mortgages have a tangible underlying asset, they work well with Islamic financing,” Ashar Nazim, partner at Bahrain-based Global Islamic Banking Centre of consultancy EY, told Gulf Times.
“There are multiple options on offer including Musharaka - [partnership] and Ijara - [leasing] based contracts,” he added.
To acknowledge the advantages of Islamic home financing, the fundamental differences between Shariah-based financing and conventional mortgages or home loans need to be understood. It is true that both differ little in terms of profit rates and interest rates, respectively, which is clear because they operate on the same market, need to be competitive and need to rule out arbitrage opportunities because having a lower price for “Islamic money” than for “conventional money” would distort the financial system and damage the entire finance sector.
The basic difference is the absence of interest in Islamic finance as it does not levy interest in any forms, but involves risk and profit sharing over an asset, in this case a property. The ethical component, apart from the absence of riba (interest), is that Islamic lenders do not solely look at earning profits but also grant loans “for the interest and growth of the community,” while conventional banks simply want to earn money from compound interest.
This has critical implications on home financing, for example in case a borrower runs into difficulties repaying his instalments. Islamic banks do actually buy the property and lease it out to their client until it is paid off at pre-agreed leasing rates that include a profit for the bank. Given that conventional lenders are driven to make money on compound interest, they often are not financially incentivised to prevent home owners from a foreclosure when they default on their payments.
Islamic banks, in turn, are much less likely to pursue foreclosures as they own the property anyway, but tend to seek joint solutions with the borrower. That way, experts think that the sale of and speculation with mortgage-backed securities that have been singled out as the culprit for the severe economic turmoil in 2008 wouldn’t have been possible in an Islamic finance environment.
Adding to that, there is no uncertainty over the amount of recurring payments in Islamic finance contracts even over the long term which gives clients peace of mind.
“For example, the profit amount or rate is clearly spelt out in the agreements and does not change unless both parties agree to amend it. This has proven rather advantageous especially for clients who had taken under-construction finance from the bank and even though the deliveries of the units were delayed, the profit amounts that they had to pay after years of delay were in line with what was agreed at the time of contract signing,” says Pawan Dhawan, head of home finance at Dubai-based Noor Bank.
Islamic finance assets in Qatar, of which a sizeable part are property and real estate, as of 2014 were at about $72bn, up from $56bn at the end of 2013, and are expected to reach more than $150bn by 2018.

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