How do lenders make profit from ‘interest free’ products?

Scrolls architectural drawings and small house. [Photo: Courtesy]

The real estate market remains one of the most vibrant economic pillars and has remained a key contributor to the GDP.

The Kenyan psyche has the dreams of owning a piece of land or a house at the core of its dreams. The only challenge? The question of financing. This has led to lenders seeking ways to make their facilities appealing and to attract people from different backgrounds.

It is this endeavor that has seen the concept of Islamic banking gain ground. Muslim communities who are said to be approximately 11.1 percent of the Kenyan population or close to 4.3 million people, make for an appealing market.

This coupled with the unique requirements of the religion on leading and interest has driven the rise of Sharia-compliant products, this even in real estate lending.

Abdalla Abdulkhalik, CEO of Gulf African Bank says that many home buying clients wonder how Islamic compliant products give profit to keep the companies that offer them afloat by profiting from the buying and selling of approved goods and services.

He says that sharia compliant products at first benefit the companies when they purchase these products using the Ijara or Murabaha and the clients in return buy them.

“The principal means of Islamic finance is as simple as that. They are based on trading where it is essential that risk be involved in any trading activity, so banks and financial institutions will trade in Sharia-compliant investments such as Diminishing Musharakah, which is true ownership,” Abdulkhalik says.

“With an Ijara scheme, the bank makes money by charging the customer rent; with a Murabaha scheme, a price is agreed from the outset, which is more than the market value. This profit is deemed to be a reward for the risk that is assumed by the bank,” Abdulkhalik says.

While Islamic banking concepts remains a relatively less understood in the market, they have been gaining ground over the last few years with even mainstream banks trying to tap into this segment with products tailormade according to Sharia requirements. Their approach, especially, as relating to real estate, provide an alternative to the conventional mortgage that still remains woefully underutilized.