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Wednesday, November 20, 2019
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IHFD's Mortgage Models

In Afghanistan it is legal to charge interest for mortgages and IHFD has developed a system to enable a conventional mortgage program to be introduced, should the customer prefer that option.  However, IHFD is also fully aware of many customers' preferences for Sharia Compliant mortgages.  This is why IHFD is also offering Ijara and Murabaha mortgage systems, which are based on Sharia (Islamic Jurisprudence) requirements.

  
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Murabaha Contract

Sharia compliant mortgages were initially based on the Murabaha contract. In a modern context, Murabaha involves the purchase of an asset/commodity by a financial institution at the request of a customer. This customer then purchases the asset/commodity from the financial institution under a deferred payment arrangement designed to cover the costs of purchasing the asset/commodity with a pre-agreed upon profit mark-up. The mark-up constitutes the bank's profit and has been widely used as a substitute for the charging of  interest by institutions that wish to adapt interest-based banking to Islamic requirements. The calculation of the mark-up may be in the form of a fixed lump sum or it may be a calculated as a percentage of the financed amount.

  
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Ijara Contract

 Ijara is fast becoming the most popular method of property finance in the Muslim World. It is a more flexible scheme than Murabaha as it enables the customer to repay the mortgage early with one payment, or to make additional "overpayments" during the life of the mortgage, thus reducing the length of the mortgage. Ijara shares many characteristics with lease financing and hire-purchase arrangements. It involves a lessor (usually a financial institution) purchasing an asset and renting it to a lessee for a specific time period at an agreed rent, or receiving a share of the profits generated by the asset.

There are two main models under the Ijara structure. The first involves a longer term lease that usually ends with the transfer of ownership of the asset to the lessee (Ijara wa lqtina), similar to a modern finance lease. The second type of lease is for a shorter term and will usually end with the financial institution retaining ownership of the asset, in a manner similar to an operating lease. The rental income from this second type of lease will take into account the depreciation of the asset. Islamic mortgage technology may utilize either of the two Ijara structures. Under the Ijara structure the bank and customer jointly own a property and the customer buys out the bank's share over time.

  
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