Risk sharing, not profiting unjustly or unfairly, not charging excessive charges; in a residential purchase context, allowing part rent, part purchase, sharing equity upside, sharing downside property risks. These characteristics apply equally to an approved Islamic home finance plan as they do to a new conventional purchase plan designed for a housing association in the north east of England.
What does this matter? For many years it has been felt that Western finance constructs have been squeezed and shaped to meet the requirements of the fatwa (approval) for Islamic finance. One result of this has been an understandable reluctance to provide an Islamic checklist to those structured financiers who specialise in dressing a product to fit a market, rather than perhaps understanding and applying the underlying intentions and principles. The desire to conform to those Islamic standards is being driven by a desire to access a rich seam of devout consumers prepared to pay a premium for compliance, and to harness rich Islamic investment funds, rather than shape and deliver products or investments which enhance and develop the lives of Muslims within their beliefs and philosophy.
The tide is turning. In ethical and social investment arenas there is significant interest in three areas of Islamic finance: Ijara, Musharaka and Mudaraba. Musharaka is the basis for property transactions which allow shared equity participation within a trust holding, providing much more flexibility to manage changes in lifestyle and more fairly share market rises and falls in residential property over a longer period of time. This can provide a much more transparent and fairer approach than Western style 100% mortgage finance or the more limited traditional shared ownership structures.
There are similarities between partnership finance structures of Mudaraba, and ljara leases. In the former, some people provide labour and others money, in a plethora of 'Big Society' style co-operatives and social enterprises, bringing together those who work, and give their 'sweat equity'. Then there are those who provide funding and those who share in a financial loss/gain Ijara- based lease-purchase contracts, which can offer a fairer sort of hire-and hire-purchase arrangement of equipment, such as washing machines and other household appliances.
If there is an interest from ethical and social residential property to engage with and be inspired by Islamic based principles, how interested are Islamic funds in residential property, especially student, affordable or social housing?
The evidence is mixed. There is also anecdotal evidence of a tightening of conditions for investment funding to reflect wider, purposive beliefs of Islamic funds. One such interesting example is the financing of student halls of residence. The usual student bar and pool table on the ground floor is being replaced by a coffee bar, with a restrictive covenant on the space becoming licensed, as a condition to access to that investment funding.
Housing associations have started dialogues with Islamic funds which have financed other UK core infrastructure and utilities, such as ports and airports, water and electricity. Social housing can offer a solid investment yield. Not racy but solid and responsible, reflecting the core values of a mature residential regulated housing industry worth around £100bn.
Islamic finance techniques offer new ideas and new ways of financing. This financing is perhaps more in line with the spirit of our times. There is a greater sense of partnership and risk sharing; and an aversion to excessive rates of return. Islamic finance principles offer useful ideas to the increasingly social and ethical spirit of our post banking crisis. Yet even so, ethical and social structures still have to provide a return and perform at an acceptable yield or investors will be thin on the ground. The real plus is that Islamic finance offers different ways to raise finance and widens to base of potential funders.