Islamic Finance Standard Documentation in the context of Real Estate Finance Transactions
Overview
Islamic real estate finance is becoming increasingly mainstream. The purpose of this Practice Note is to explore in some detail the main Islamic real estate finance structures:
Ijarah,
diminishing Musharaka, and
commodity Murabaha.
focusing on the documentation required for each structure and the legal, tax and regulatory issues which underpin them. This Practice Note will also touch upon the principles and practicalities involved in Islamic real estate investment in the context of UK real estate transactions.
Practical Guidance
Ijarah
Ijarah, which means leasing, is a structure commonly used in the UK residential property market.
Under this structure, the bank buys the property from the seller and then the bank grants a lease to the buyer for a certain term. At the same time as granting the lease, the bank promises to transfer the property to the buyer at the end of the term of the lease. The buyer then makes payments to the bank during the term of the lease, which comprise of both rental payments and capital contributions. The rent represents an agreed profit, typically calculated using a benchmark, such as LIBOR, plus a margin.
