Sharia-compliant lending expands pathways to property purchase
Buying a home is one of the biggest investments most of us will make in our lifetimes, so it’s critical that it’s done right. For a growing number of individuals, this means choosing financial products that are not only the best option in terms of market competitiveness, but also align with other hugely important factors, like faith and values.
In particular, Islamic finance has experienced an increase in demand over the years, driven by the desire for greater flexibility and accessibility of shariah-compliant mortgage products. But it’s fair to say that while historically the adoption of Islamic finance was slow, brokers have been increasingly supportive over the years. There has been a boost of attention on financial products that allow buyers to stay true to their values while venturing into the complex world of home ownership. Financial providers who opt for a more inclusive approach to home ownership will open the door for buyers – many of whom thought home ownership was a distant and far-fetched reality.
Financing homes today is a tough reality
Britain’s housing market is a challenge, to say the least. Supply remains tight, affordability is strained, and many prospective buyers feel locked out. In fact, Islamic finance paves the way for faith-aligned home ownership40% of young adults cannot afford to buy one of the cheapest homes in their area, even with a 10% deposit.
Around Islamic finance paves the way for faith-aligned home ownership7% of the UK population identifies as Muslim, yet only a very small proportion of them have been able to access home finance that aligns with their needs. Conventional mortgage products might work for the majority, but that could still leave a considerable percentage of the UK population locked out of home ownership. Islamic home finance, while not a new concept in its entirety, has often been overlooked due to perceived complexities and outdated notions. Now, a new wave of Islamic fintech is disrupting the market and bringing shariah-compliant products to the modern banking standards that the general consumer expects.
With a Islamic finance paves the way for faith-aligned home ownershipCAGR of 11%, the Islamic finance industry is showing how quickly people’s opinions are changing. Even beyond the Muslim population, more people are exploring Islamic finance than ever before. This is because, for some profiles, due to the deposit criteria, it’s more accessible than conventional products in certain circumstances – for example, some providers make it easier for people to get on the property ladder by allowing family-supported applications, with criteria allowing gifted deposits, and income from up to four applicants being taken into account.
The UK Government’s recent Financial Inclusion Strategy announcement is a good example of this broader shift, with policymakers recognising the need for fairer access to financial services. While the sentiment aligns with the industry’s broader push for inclusion, this is only the tip of the iceberg. True financial inclusion can only be achieved when all vulnerable and overlooked communities are considered, including those who have been locked out of conventional banking products.
Reimagining the mortgage model with Islamic finance
Islamic home finance avoids interest and instead uses a partnership-based structure. The customer and provider buy the property together, and the customer gradually purchases the provider’s share over time. Profit is generated through rent on the portion of the property the homeowner doesn’t own, rather than interest.
Flexibility also plays a key role here. Some Islamic finance providers allow a wider range of applicants than conventional lenders, which is helpful for households with multiple contributors or non-standard income. From a broker’s perspective, what really makes a difference is that Islamic providers take the time to work through a case with them and the applicant. Instead of a rigid ‘computer says no’ response, brokers find the process far more collaborative, with underwriting that looks for a solution rather than a reason to decline. Islamic finance is a solution that recognises the reality of modern living arrangements and works to make home ownership more accessible, not less.
Championing the global stage
And the increasing popularity of Islamic finance is not limited to the UK, as we’re seeing that financial centres across the world are expanding their offerings as its demand grows. Countries in the Middle East and Southeast Asia have already established large, sophisticated markets, while Europe is now seeing stronger adoption among buyers searching for alternatives to conventional interest-based systems. Advisers are also finding that providers differ from the traditional Middle Eastern banking subsidiaries that have historically dominated this space. Instead of leaning on older, less flexible models, some providers have opted for a more modern, digital approach that is closely connected to the needs and expectations of UK customers, making it easier for brokers to support clients who want an ethical alternative without an added layer of complexity.
What’s become clear is that there is a real opportunity to lay new foundations of home ownership that are aligned with faith.Inclusion and accessibility are only a few benefits of having a more diverse home ownership market, as Islamic finance provides an alternative way for a more practical route onto the ladder at a time when many feel like they have no other options.