The Shariah compliant refinancing trap

Mohammed Amin provides guidance on avoiding traps for the unwary when using Shariah compliant financing

The purchase of real estate, whether a principal private residence or an investment property, is normally funded in part by equity provided by the purchaser, and in part by interest bearing debt provided by a bank or other financial institution.

However, many Muslims consider that Islam prohibits receiving or paying interest. Accordingly, alternative acquisition structures have been developed which comply with the rules of Islam as interpreted by Shariah scholars, but which do not involve the payment of interest to the finance provider. Shariah scholars allow transactions to have similar economics to debt, provided they do not involve borrowing money or paying interest.