While Islamic finance structures are designed to cater to devout Islamic followers, all South Africans, regardless of faith, are eligible to avail of this option. The underlying principle of Islamic finance is one that has a socially responsible conscience, aligned with practices that comply with Shariah law. The theory is that one should not profit from money alone, and that money should not be used to cause harm.
What is Shariah?
Shariah is Arabic for "the right way" or "the path." It is a legal system rooted in the laws and ethics contained within the Quran, the sacred scripture of Islam. When applied to banking and home loans, the philosophy emphasizes risk-sharing rather than risk transference.
In traditional banking, risk is usually more weighted on the borrower. In contrast, Islamic banks or Islamic financial services provided by a bank share in the risk of borrowing and lending, including any losses or profits.
Shariah law prohibits the payment of interest, known as riba.
What is Riba?
Riba is an Arabic word that means "increase," "exceed," or "addition." As a result, Islamic home loans are structured to be interest-free. This is based on the principle of Shariah law that forbids any interest or increased charges on loans, considering them unjust due to potential unethical practices, exploitation, or social injustice. Instead of charging interest, Islamic finance uses a profit-sharing structure, called Musharakah, whereby borrowers and lenders agree to share in the profits as payment for the loan.
What is Musharakah?
Musharakah means "sharing" in Arabic. It refers to the joint partnership and agreement between borrower and lender to share in profits and losses.
One such agreement is called Diminishing Musharakah. Here, the bank and the homebuyer agree to joint ownership of a property. Generally, the bank owns the largest share, and the home purchaser is considered a lessee, paying rent to the bank. Over an agreed timeframe, these payments diminish the bank’s share, while the homebuyer’s percentage in the property increases, until they become the sole owner. At this point, the bank transfers the Title Deed to the homebuyer.
Default
Similar to a traditional home loan, if a homebuyer defaults on the payments due under a Diminishing Musharakah agreement, the bank can initiate legal proceedings and may sell the property to recover the outstanding balance owed.
Social Responsibility
The key objectives of Islamic banking, as noted by the Stanford Social Innovation Review, are to ensure welfare and prevent harm, especially concerning religion, life, intellect, prosperity, and property. Accordingly, there are clear guidelines:
- No investment in industries associated with alcohol, weapons, or gambling.
- Mandatory transparency in all transactions, operations, and financial reporting to promote trust and accountability.
- Emphasis on social welfare and environmental sustainability.
- Priority on ensuring economic growth and job creation.
Application
Generally, an application for an Islamic home loan requires the same documentation as a traditional loan, including:
- Proof of address, not older than three months.
- Certified copies of your identity document.
- Proof of income via the last three months' salary slips; or, for self-employed individuals, the latest annual financial statement and income tax return.
- Bank statements from the last three months.
- A signed statement of personal income and expenditure, as well as a signed statement of assets and liabilities, even if married in community of property.
Deposit
A deposit is usually required, although the amount can be negotiated with the bank. It is typically a percentage of the property's purchase price.
Using a Wakalah Contract
Wakalah means "protection," "delegation," or "authorization," essentially a "contract of agency." This term refers to a contract between a person or principal (Muwakkil) and an agent (Wakil), who is authorized to act on the Muwakkil’s behalf. The contract outlines specific tasks or actions the Wakil is permitted to undertake and includes payment for such services.
The advantage of a Wakalah is that the Wakil is bound to adhere to and apply Shariah principles and Islamic law.
Consideration
As with any home loan, an Islamic version should be considered in light of what offers the best rate for you, your goals, and your individual circumstances. In addition to national banks in South Africa, there are dedicated Islamic banks, including:
