Financial Temperature

How does islamic finance /mortgage actually work in plain english please?

I dont understand finance at the best of times and this is even more confusing. So basically you are still paying the interest, its just dressed up. Interest is interest just cos you put halal/islamic infront of it doesnt make it all right.

Public Comments

1. if im right, muslims are forbidden to charge interest. so they rent the money instead, of course at the same rate.
2. I am not a scholar or a Muslim. To the best of my understanding and knowledge, in simple terms, it works like this: Ijara - the bank takes the cost of the house, plus the interest you would pay if you got a mortgage from a traditional bank and loans you that amount of money in total. Then you pay them back. You're basically borrowing the interest up front. Hopefully others will know.....
3. Intrest is Haram in Islam, Forbidden. So if you take out a loan, you pay back exactly the same amount you borrowed. No intrest.
4. Well in western banks...you borrow the money and pay it back with interest....but what you buy with it is yours. In the islamic banks......based on the length of your payments....the banks figure out how much interst you would have paid. Then they then buy the house...they tack on the estimated interest to the price they bought it for...then sell it back to you at that price. So lets say you wanted to buy a house for 100,000$. Pay it back over 10 years...lets say the interest would have added up to another 100,000. So they sell the house to you for $200,000....and you make payments...you never own the property until you pay it off though. They don't give you any money...so its not a loan....its "trade". I heard that's changing somewhat..so you can sell your lease....otherwise...if after 5 years you want a new house....since you never owned that house...you don't get the money back that you put in..plus you're out of a house.
5. Islamic Banking and Finance system is based on some 'Modes of Finance' or 'Islamic Financial Instruments'. These modes are Murabaha, Ijarah, Musharakah, Salam, Istisna, etc., and are applied as per the nature of contract. The mode of finance used for 'Mortgage' is Ijarah or Ijara. Given below are the basic principles of Ijarah: (1). Transferring of usufruct of an asset to another person for an agreed period, at an agreed consideration. (2). The Asset should be valuable, identified and quantified. (3). Anything which cannot be used without consuming cannot be leased out. e.g.. Money, Wheat etc. For more details, you may visit 'Free Study Notes' section of 'Academy for International Modern Studies' or AIMS (a UK based Online Institute for Islamic Banking and Finance, www.learnislamicfinance.com)