Shariah Bridging Finance: How it Works
The global Islamic finance market is growing steadily as investors spot significant opportunities for growth and direct their investments toward Islamic sectors.
Islamic finance products, including Shariah bridging loans, are based on the belief that money has no intrinsic value and that you cannot make money from money. Therefore, it is forbidden to lend or receive money with interest.
What’s more, Islamic finance must be ethical, this means investments in products such as tobacco, alcohol or gambling are forbidden.
Shariah finance products are structured in a way that accommodates and complies with Islamic finance principles. So, instead of receiving interest on savings and investments, Muslims receive a share of the profit or loss.
Islamic finance products are open to both Muslims and non-Muslims.
What is a Shariah bridging loan?
Shariah bridging finance, also known as Islamic bridging finance or Halal bridging finance, is, for the most part, just like a traditional bridging loan.
A bridging loan is a short-term loan used to bridge a gap between the sale of one property and the purchase of another pending the arrangement of longer-term financing such as a residential or a buy-to-let mortgage.
The key difference between a traditional bridging loan and a Shariah bridging loan is the way that interest is applied. Shariah bridging finance is not a loan but rather a payment plan. There are two main ways that Shariah bridging loans can be structured and the Murabaha structure is the most popular method used in the UK.
The Murabaha structure
The lender will buy the property and then sell it on to the borrower at a profit. The borrower will pay it back in regular instalments until the total cost is covered, at which point they become the owner of the property.
Alternatively, the borrower can enter into an equity partnership with the lender whereby they jointly purchase the property and then over time the borrower pays the lender for it’s share of the property. This option is known as ‘Musharakah’.
What makes bridging finance Shariah-compliant?
Shariah bridging finance must comply with the following:
· The finance must be interest-free
· The funds must be used in a productive way
· The finance must be asset-backed
· The property cannot be used for, or associated with, prohibited activities including alcohol, tobacco, gambling or pornography
· Business must be conducted in a way that is ethical and socially responsible
· The borrower and lender must share the financial risk
What are the advantages of Shariah bridging loans?
There is increasing importance being placed on responsible investment and ESG funds in the UK and beyond. Investors are taking more responsibility for the environmental and social impact of their investments and the combined power and influence that they, as investors, have within society.
These ethical initiatives echo the sentiment of Islamic finance products and strive to make the world a better and fairer place.
Borrowers like to know that their activities, and those of their lender, are transparent, fair, and ethical.
One of the biggest advantages to an individual borrower is that there is no interest payable on their bridging finance, although they will still pay a profit rate or a fixed leasing cost depending on the structure of their finance. What’s more, there will be no hidden or unexpected fees in accordance with Islamic finance principles.
How to apply for Shariah bridging finance
At Sigma Knight we specialize in all types of bridging loans including Shariah bridging finance.
We are an independent broker which means that we have access to multiple lenders and can recommend the most suitable lender for your specific requirements. Our advice is free and impartial.
If you would like to learn more about your options, please get in touch.