Real Estate Study Guide
Loans
Islamic and Conventional forms of financing seeks to finance productive channels for returns. The difference is that in conventional loans, a fixed reward is obtain in exchange for the extension of the loan (interest) while Islamic loans are unable to do that as they cannot charge interest.
Loans provided for the purchase or development of Real Estate under Islamic financial system requirement of firms and individuals are fulfilled through Murabaha, Musharaka and Mudaraba. Although these methods of finance are very much like conventional loans, differences still exist in the contracts with regards to the nature of risks and returns, and the legal title of the property at the time of the financing.
In Musharakah, the borrower does not repay any interest to the lender, but in turn shares the profit on a predetermined ratio in the joint partnership. However, unlike a traditional creditor, the losses would also be shared in this partnership. As such, the financier pays heavy focus on the viability of the project rather than the interest rate of the loan that he is issuing out.
Mudaraba is a kind of partnership where one partner gives money to the other to invest in an asset. In a mudaraba al-muqayyadah, the borrower can only invest in a pre-specified business, but in the case of al-mudaraba al-mutlaqah, the borrower has the choice to invest in any assets that he deems fit, which offers more flexibility. We must however, keep in mind that the profit of the investment would be shared by the partners in a pre-determined ratio just like musharaka, but the losses would be solely born by the investor alone, and the borrower would only lose his time and management in the failed project.
In a conventional loan, the lender would lend money to the debtor for a pre-determined interest rate as compensation for the underlying risk for taking this investment opportunity, and would require the debtor to fully repay the principal and interest owed to discharge
Islamic and Conventional forms of financing seeks to finance productive channels for returns. The difference is that in conventional loans, a fixed reward is obtain in exchange for the extension of the loan (interest) while Islamic loans are unable to do that as they cannot charge interest.
Loans provided for the purchase or development of Real Estate under Islamic financial system requirement of firms and individuals are fulfilled through Murabaha, Musharaka and Mudaraba. Although these methods of finance are very much like conventional loans, differences still exist in the contracts with regards to the nature of risks and returns, and the legal title of the property at the time of the financing.
In Musharakah, the borrower does not repay any interest to the lender, but in turn shares the profit on a predetermined ratio in the joint partnership. However, unlike a traditional creditor, the losses would also be shared in this partnership. As such, the financier pays heavy focus on the viability of the project rather than the interest rate of the loan that he is issuing out.
Mudaraba is a kind of partnership where one partner gives money to the other to invest in an asset. In a mudaraba al-muqayyadah, the borrower can only invest in a pre-specified business, but in the case of al-mudaraba al-mutlaqah, the borrower has the choice to invest in any assets that he deems fit, which offers more flexibility. We must however, keep in mind that the profit of the investment would be shared by the partners in a pre-determined ratio just like musharaka, but the losses would be solely born by the investor alone, and the borrower would only lose his time and management in the failed project.
In a conventional loan, the lender would lend money to the debtor for a pre-determined interest rate as compensation for the underlying risk for taking this investment opportunity, and would require the debtor to fully repay the principal and interest owed to discharge