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How Islamic home finance works
The main structures in plain English, what makes them different and the words you will meet along the way.
The idea in one paragraph
Islamic finance avoids Riba. The Arabic term usually translated as interest or usury, which Islamic finance avoids. Glossary, usually translated as interest. Instead of lending you money, a provider normally buys the property, or a share of it. You pay to use the part you do not own and buy it over time. The provider earns rent or an agreed profit rather than interest. In the UK these arrangements are usually called Home purchase plan. The UK regulatory term for Sharia-compliant home finance such as Ijara and Diminishing Musharakah arrangements. Glossary and are regulated by the Financial Conduct Authority.
The three main structures
| Feature | Diminishing Musharakah | Ijara | Murabaha |
|---|---|---|---|
| Who owns the home at the start | You and the provider jointly | The provider | You, once the provider sells it to you |
| How the provider earns | Rent on its share | Rent | A profit built into the sale price |
| Can payments change | Usually, when rent is reviewed | Usually, when rent is reviewed | Usually fixed |
| When you own it outright | When you have bought the provider's whole share | When all agreed payments are made | When the sale price is paid off |
Working assumption General descriptions. Each provider's contract sets the actual terms.
Diminishing Musharakah: co-ownership
You and the provider buy the home together. Each month you pay rent on the provider’s share and buy a little more of it. As your share grows the rent falls, and the home becomes fully yours at the end.
Ijara: lease to own
The provider buys the home and leases it to you. Your monthly payment combines rent with payments towards buying the home. Ownership transfers once the agreed amount has been paid. Some UK products combine Ijara with Diminishing Musharakah.
Murabaha: cost-plus sale
The provider buys the property and sells it to you at a higher agreed price, paid in instalments. The profit is fixed at the start. It is less common for UK home purchase and more often used for commercial or short-term property finance.
Regulation and religious approval are different things
FCA regulation protects you as a consumer: how products are sold, how complaints are handled and what happens if something goes wrong. Sharia approval is a religious judgement made by scholars the provider appoints. A product can have one without the other, so check both.
Glossary
Terms are linked from guides across the site. Tap a dotted word anywhere to see its definition without leaving the page.
- Acquisition payment
The part of a monthly payment that buys more of the property, as opposed to rent.
- Diminishing Musharakah
A co-ownership arrangement. You and the provider buy the home together, and you buy the provider's share gradually while paying rent on the part you do not yet own.
- Early settlement
Buying the provider's remaining share, or paying off the remaining amount, before the end of the term. Some arrangements charge a fee for this.
- Equity
The share of the home's value that you own.
- Financial Conduct Authority (FCA)
The UK regulator for financial services. Firms that advise on, arrange or provide home purchase plans must be authorised by the FCA.
- Financial Ombudsman Service
A free, independent service that settles complaints between consumers and the financial businesses it covers.
- Home purchase plan
The UK regulatory term for Sharia-compliant home finance such as Ijara and Diminishing Musharakah arrangements.
- Ijara
A lease-based arrangement. The provider buys the home and leases it to you, and ownership transfers once the agreed payments are complete.
- Murabaha
A cost-plus sale. The provider buys the property and sells it to you at an agreed higher price, paid in instalments.
- Portability
Whether an arrangement can move with you to a new property if you move home.
- Product fee
A fee charged by the provider for setting up the arrangement. It may be paid upfront or added to the finance.
- Rent
In Islamic home finance, the payment for using the part of the home the provider owns. It takes the place of interest.
- Riba
The Arabic term usually translated as interest or usury, which Islamic finance avoids.
- Sharia supervisory board
Scholars appointed by a financial institution to review whether its products comply with Islamic principles.
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