Islamic Bank of Britain plc (IBB), (www.islamic-bank.com), the UK’s only wholly Sharia compliant retail bank, today announced the launch of its new Home Purchase Plan (HPP). The home finance product is the first in the UK to be backed by the Government’s new Help to Buy: HPP guarantee scheme.
Commenting on the launch, Sultan Choudhury, Chief Executive Officer, IBB said, “Having worked directly with the government to adapt its Help to Buy mortgage guarantee scheme to include HPPs, IBB is delighted to be the first provider to take advantage of the initiative. We know from experience that some customers, especially first time buyers, struggle to raise a deposit greater than 10% of the property value but can afford the necessary monthly payments. IBB’s new product has been designed to meet their needs and we are very pleased to be putting the reality of home ownership within the reach of many more individuals.”
Offering a rental rate of 4.99%*, fixed until 31 December 2017, IBB’s new Sharia compliant HPP provides finance up to 90% of funds to value (FTV), meaning that customers can secure home finance with an initial contribution of just 10% of the value of the property. This is half the amount previously required by the Bank.
The HPP is expected to appeal to customers of all faiths as it offers flexibility and a more transparent fee structure compared to many conventional mortgages; IBB does not charge any penalties for terminating the HPP agreement early, and there are no hidden fees. The £999 administration fee of the new 90% FTV HPP represents the Bank’s standard fee of £399, which is proportional to the work undertaken by IBB to process the arrangement, plus a fair contribution towards the amount that the Government charges IBB to be part of its Sharia compliant Help to Buy scheme.
IBB’s new HPP marks an important milestone for Islamic finance in the UK as it puts ethical and affordable home finance within reach of many more people looking to get on, or move up, the housing ladder. Under the rules of the Scheme, it is not available to those wishing to purchase a second property.
An inclusive bank, currently celebrating its 10th anniversary, IBB welcomes customers of all faiths and is attracting increasing numbers of non-Muslims. The Bank believes that nearly 83% of customers who joined the bank between 1st January 2013 – 15th August 2014 and opened a Fixed Term Deposit account, were non-Muslim, drawn by its great rates, excellent service and its ethical approach to doing business.
As a Sharia compliant product, IBB’s HPP differs from a mortgage where the customer borrows money from a lender, which is then repaid with interest. A HPP uses the Islamic finance principles of co-ownership (Diminishing Musharaka) with leasing (Ijara), where IBB and the customer buy the property as partners and the customer pays rent on IBB’s share in the property. At the end of the term, when all acquisition payments have been made and the finance has been settled, ownership of the property transfers fully to the customer. See the ‘How does a HPP work’ section below for a full explanation.
The home finance provided by IBB is generated from ethical activities, and not from businesses that are considered unlawful under Sharia law, i.e. companies that deal in interest, alcohol, gambling, pornography, speculation, tobacco, arms and other commodities contrary to Islamic values.
The Help to Buy: HPP guarantee scheme works in a similar way to the Help to Buy: mortgage guarantee scheme, but takes into account the different way that a HPP is structured. It enables Islamic banks to take a guarantee for their Home Purchase Plans where the consumer has an initial contribution of between 5% and 20%. The guarantee compensates the bank for a portion of net losses suffered in the event of default. This reduces their risk of offering home finance to consumers with a low initial contribution. The original Help to Buy scheme was launched in October 2013 in order to increase the availability of low-deposit finance for UK households.
Since IBB opened its doors as the UK’s only wholly, Sharia compliant retail bank in 2004 it has developed the largest range of Islamic retail financial products in the UK. In February 2014, the Bank was acquired by Masraf Al Rayan QSC (Al Rayan). Al Rayan intends to build upon IBB’s excellent foundations and has invested over £75m to support its expansion.
*At the end of the term, rental rates will revert to the IBB Variable Rental Rate, which for IBB’s Home Purchase Plan products is currently 4.49% (Bank of England Base Rate (BBR) + 3.99%). This is the Bank’s revert rental rate. The IBB Variable Rental Rate is subject to quarterly rental reviews when the Bank will consider changes to its rental rate as well as changes to the Bank’s margin, though margin increases are capped at 2.00% above the margin that applied at the outset.
‘How does a HPP work’
The principle difference between a HPP and a conventional mortgage is that the lending/borrowing relationship does not exist. Instead, HPPs are based on co-ownership and lease agreements arranged using two separate principles of Islamic finance. For this reason interest does not form part of the arrangement and each monthly payment consists of the following two elements:
Rental element – this is the amount that the customer is paying to the Bank as rent on the Bank’s share of the property. This is in accordance with a lease (Ijara) agreement.
Acquisition element – this is the amount that the customer is paying to purchase a part of the Bank’s share in the property. This is in accordance with a co-ownership (Diminishing Musharaka) agreement. With every payment the customer’s equity in the property increases and the rental element decreases, reducing the Bank’s share in the property on a diminishing basis.
For all of IBB’s HPPs, including its fixed rental rate products, the customer can buy the Bank’s share in full, or sell the property at any time, without incurring an early settlement penalty charge, subject to clearing the IBB finance amount in full. The Bank does not claim any share in any appreciation of the property. Part acquisition payments may also be made subject to a small admin fee, except whilst a fixed rent rate applies.
Minimum finance £30,000, maximum finance £540,000. Minimum property value £90,000. Maximum property values £600,000. Islamic Bank of Britain plc uses affordability criteria under which a customer’s income and expenditure are assessed. There are also eligibility criteria specific to the Help to Buy HPP guarantee scheme which customer’s will also need to meet.
Offer may be withdrawn at any time without notice. Subject to status. Terms and conditions apply.
About Islamic Bank of Britain
Islamic Bank of Britain plc (the Bank, IBB) has pioneered Sharia compliant retail banking in the UK and now offers the largest range of Sharia compliant retail financial products in the UK. These include Sharia compliant mortgage alternatives, the Home Purchase Plan (HPP) and Buy to Let Purchase Plan (BTLPP), current accounts and savings accounts. The Bank was also the first to introduce Sharia compliant business banking to the UK, and now offers a wide range of institutional and business banking products and services, including Commercial Property Finance. Several of the Bank’s products remain unique in the UK retail financial market.
The Bank is authorised by the Prudential Regulation Authority, regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of Financial Services Compensation Scheme.
Sharia compliant banking operates without the use of interest and is founded on Islamic finance principles derived from trade, entrepreneurship and risk-sharing.IBB has a dedicated Sharia Compliance Officer (SCO) and a panel of respected Sharia Scholars, called the Sharia Supervisory Committee (SSC), which acts as an independent body to ensure that IBB’s products and activities are Sharia compliant.
As a Sharia compliant bank, the source of IBB’s funding, profits and business investments must be ethical. They cannot be from businesses that are considered unlawful under Sharia law, i.e. companies that deal in interest, alcohol, gambling, pornography, speculation, tobacco, arms and other commodities contrary to Islamic values.
Whilst IBB offers products and services that are designed in accordance with Sharia principles, it is an inclusive, ethical organisation and welcomes customers of all faiths looking for a bank with a transparent, prudent and community-focused approach.
Originally published on www.zawya.com