Islamic Home Purchase Financing: A Conceptual Overview

Abstract

This paper provides a simple, generic introduction to, and survey of, the transactional structures and rudimentary principles applicable to Shari`ah-compliant home purchase financings. The paper summarizes six of the most frequently used home purchase financing structures used by banks and financial institutions that provide Shari`ah-compliant alternatives. They are: (a) the lease (ijara); (b) the diminishing partnership or diminishing musharaka (musharaka mutanaqisa); (c) the cost-plus sale (murabaha and tawarruq); (d) the deferred payment sale (bay' bithaman ajil); and (e) the two-tier construction contract financing (istisna'a - parallel istisna'a).

Keywords: Islamic finance, Shariah, Home Purchase, Financing, Lease, Ijara, Partnership, Musharaka, Murabaha, Tawarruq, Bay Bithaman Ajil, Istisna'a

JEL Classification: K11, K33, K30, L85, N15, N25, O53, P43, R21, F23, F34, F36, G15, G21, G32, H54