Co-owning a house with the bank

By Ferdinand Mwongela

Owning a home is the classic Kenyan dream, and the economic benefits of homeownership are immense, yet it remains a luxury very few can afford. In an effort to realise their dream, many Kenyans are turning to mortgage facilities offered by financial institutions. The latest in the market is being offered by Islamic financing institutions.

The concept of Islamic financing has been gaining ground slowly in Kenya and around the world. The scheme has been billed as one of the fastest growing sectors in international banking industry. Recently, some Shariah compliant banking institutions launched into the Kenyan market mortgage products modelled along this concept.

Undoubtedly for a long time, and due to bias influenced by beliefs and inaccurate information as well as Islamic regimes viewed as harsh, the term Shariah Law acquired a negative connotation to non–Muslims and as such products like this have been dismissed out of hand or viewed with a lot of suspicion.

But this should not be the case, argues Anthony Mugera, Home Mortgage Manager with Gulf African Bank.

He says the system is slightly different from the conventional mortgage facilities in that Islam, on whose principles the bank is founded and whose law governs the facility, is totally set against the charging of interest.

Malik Adan Roba, a Muslim, says Shariah compliant banking is a welcome alternative especially to the Muslim community.

Mugera says that the bank offers mortgages on a partnership basis where the bank partners with the client and puts up part of the purchase price for the property in question. Slowly over time, the client buys the bank out in a system called diminishing musharakah.

A client interested in buying a house or a property contributes a certain percentage of the total amount and the bank raises the rest. For example with Gulf African Bank, the client contributes 20 per cent of the total amount and the bank the remaining 80 per cent, meaning the bank owns 80 per cent of the purchased property.

The customer is then required to pay rent to the bank for using part of its property while at the same time buying them out slowly through diminishing payments based on the amount of the outstanding principal.

Welcome alternative

"We do not treat money merely as a commodity," says Antone Wambura, head of Credit and Risk Management at the First Community Bank, which also offers this facility. "We do not just dump the money on you, but we are constantly with you as a partner," he said.

The customer does not start servicing the loan until they have the asset in their possession. In this case, therefore, if the house in question is not yet constructed, the banking institution giving the mortgage facility constructs the house after all the papers have been signed and then sells the property to the client.

The bank takes over the construction of the property in question until completion and hands over the completed house to the customer. Only then does the client start the payments. This is known as murabaha.

However, this has the downside of exposing the bank to risks, considering that currently the real estate sub-sector has become pretty fluid, with costs of materials and land on the upsurge every single day.

Wambura, however, points out that the bank offering the facility willingly undertakes the risk in order to get something out of the deal.

It is after the construction that the house is then sold to the customer, factoring in the cost of building and profit, which is now acceptable since the bank has accepted a level of risk.

It, therefore, follows that what is being abhorred here is the concept of "risk free" money with the belief being that you have to work for the same.

a new concept

Apart from the Musharakah and Murabaha systems, there is another kind of agreement known as Istisna in Islamic financing.

Istisna is an Arabic word, which can be translated to mean, "To ask someone to manufacture".

Open to all faiths

In Istisna, the agreement is concluded before the property in question comes into existence. For example, the financial institution has an obligation to construct the house and hand it over to the client by an agreed date. The client then in turn can pay the sum outstanding to the institution either in lump sum or instalments.

"Our duty is to finish the house within a timeline," says Wambura. Therefore, before the property is complete and handed over, the bank is committed. The property in question serves as the security for the mortgage.

According to Wambura, the concept is really catching on in the local market.

However, he thinks there is still some way to go since the concept of Islamic mortgage is still a bit new and the guidelines even with the Central Bank had not entirely covered it.

Other financial institutions that are riding high on Islamic banking include Barclays Bank, which launched its La Riba account in December 2005. However, plans to offer a mortgage facility under the account are still ongoing.

Such facilities are open to both Muslims and non-Muslims. Just like other products, they can be consumed by anyone regardless of religion or gender.

Barclays Bank Managing Director, Adan Mohammed when launching the product said that La Riba would be open to everyone. "Just as we accept deposits from people without regard to their faith."

Mugera and Wambura say all that one has to do is agree with the requirements of the product they are interested in.

First Community Bank only requires a person applying for mortgage to have an account with the bank and the requirements differ depending on whether one is an employer or employee, but no proof of faith or otherwise is required.