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Islamic housing investment finance.v3

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Wasif Khan

This document proposes an interest-free housing investment model based on diminishing musharaka. It aims to provide Muslims in the UK an alternative to conventional mortgages to purchase homes through non-riba loans and give investors an opportunity for interest-free returns. The model involves investors funding a property purchase, with the buyer gradually increasing ownership through monthly installments and rental payments until owning it completely after a predefined period. It also discusses synthetic diminishing musharaka as a viable Islamic financing structure that behaves like a normal mortgage but provides investors returns comparable to buy-to-let.

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Interest-Free Housing & Investment Based on “Diminishing Musharaka”
Mission Statement • As per European Council for Fatwa and Research's Resolution 2/4 on "Permissibility of conventional mortgage under necessity“ its obligatory on all Muslims to do their utmost to seek Islamic alternatives to fund their housing need • We offer an alternative solution to the conventional mortgages to enable Muslims in UK to Purchase house with non-riba loan • This will also provide Muslim investors an opportunity for interest-free returns at par or better than conventional returns on investments incl. buy to let investment.
How it works ? • Win win situation for both borrower and lenders as borrowers will pay rent equivalent to market price and lender will get return at par or better than traditional investment incl. buy to let • Buyer selects a property for housing and investors will fund the purchase. • Multiple investors will fund the property (Crowd Funding) • Investors and buyer share returns through monthly rental income based on their respective shares in the house • Buyer’s will pay predetermined installment & share of the rental income to increase his ownership in the house • Over a predefined duration buyer’s share will grow to 100% and investor’s share will reduce to zero at which stage the title deed of the house is transferred to the buyer
Crowd Fund Portfolio Rent +Capital payment Full payment ownership increase Down payment Investment BuyerInvestors Profit Re invest Dividends
•In MORTGAGE borrower pays interest on outstanding principal amount and capital in total •Lender has no share in increase or decrease in the value of the property •Monthly mortgage instalments are largely fixed (except for change in interest rate which can be fixed for a long period). Also the overall cost of financing is largely know and fixed •In a true diminishing Musharaka, investors receive rent in proportionate of their outstanding investment (principal amount) •Investors also receive share of increase in property value (or share loss) •As a result monthly instalment and over all price to be paid by the buyer is variable. Buyer may face a continuously changing goal post as price keep changing •It may take longer to pay •Synthetic Musharaka is based on the idea of perpetual investment of rent & principal repayments into further properties. •As the properties will multiply, investors will gain from additional rental yield’s and principal repayment from properties that didn’t constitute original property portfolio (snowball affect). •Synthetic Musharaka portfolio will generate returns far in excess of diminishing Musharaka and buy to let investment.
Perpetual investment 1,350,000 1 2,403,250 2 3,743,733 3 - 4 New investment Year As per target, after year 3, organic growth will drive investors share, without any new investment from investors, portfolio will continue to grow
Short and long term Plan • It will be CROWD FUNDING model to allow investor to start investing from as little as £50. • Mass contact campaign to be launched through various platforms like web, mosques and through community leaders. • Board of advisory will be appointed to foresee investment portfolio. • Buyers will be served on 1st come 1st serve basis. • Investors will be allowed to liquidate there shares through secondary market. • Investor profit and capital will be reinvested in portfolio, organic return will allow us to buy additional property just using reinvested amount • Recycling of return will create a loop where original investment will fund new properties. • Once enough funding will be generated, this fund aims to build own houses at discounted price for community. • Inshallah, this platform will not only be financial tool but will serve community to produce leaders. • We will be funding peoples to study in oxford & Harvard, will produce technology leaders, thinkers and politicians to shape and influence the society.
FAQ • How is it different to Al Ryan bank • Al Ryan bank don’t share profit and loss, they only interested in their capital repayment and profit, due to their bench marking borrower usual pay more than market rent • Can investor withdraw their money • Yes, investor can offload their share of the fund, they can sale their share on this platform • What if buyer couldn’t keep re payment • House will be repossessed and if no other takers available, it will be off loaded in the open market, profit and loss will be split between investors and buyers proportionally • Is it open for whole UK • For few years, our focus is on South East only • Is their any restriction on buyer or investors • Buyer has to qualify through usual credit check and affordability test, investment is open for EU residents only • Special purpose vehicle • It is not possible for more than four people to be listed on a UK land registry deed, as such each property in this fund will be owned by a special purpose vehicle (“SPV”), which will be UK Limited Company, that you can then in turn buy shares in. There is a different SPV for each and every property; therefore you will always know that you are investing in a specific property chosen by you. • What if this fund dissolve • Each property investment will be separately ring-fenced from the assets and liabilities of, as well as any other property investments on the platform. • If this fund fall into financial distress an alternative manager could be appointed to continue management of the assets in accordance with the terms of investment. • Any funds held in your account not invested in property will held in a client monies bank account in accordance with FCA rules. Separate bank account that is ring-fenced from the monies of this fund and will be returned to investors in the event of fund falling into financial distress
Appendices
Borrower: Diminishing Musharaka vs. Mortgage •In general diminishing Musharaka tends to be more expensive then traditional mortgage. •In mortgage borrower pays interest on outstanding principal amount and capital in total •Lender has no share in increase or decrease in the value of the property •As a result monthly mortgage instalments are largely fixed (except for change in interest rate which can be fixed for a long period). Also the overall cost of financing is largely know and fixed. Buyer has a certainty of paying debt within a certain time period. •In a true diminishing Musharaka, investors receive rent in proportionate of their outstanding investment (principal amount). •Investors also receive share of increase in property value (or share loss). •As a result monthly instalment and over all price to be paid by the buyer is variable. Buyer may face a continuously changing goal post. It may take an extended period of time to completely own the property.
Synthetic Diminishing Musharaka • A true commercially viable Islamic house financing product should replicate characteristics of a traditional mortgage from the perspective of borrower but should provide returns to investor equivalent to or exceeding buy to let property investment. •Borrower should only pay fixed monthly instalment and should have ability to repay all the principal over a fixed period of time •Borrower should retain full risk/reward relating to increase/decrease in value of the property. •On the other hand, investors should get returns comparable to buy to let investments with full exposure to increase/decrease in the value of the property. •This will give rise to truly commercially viable Islamic product. • We have proposed the idea of synthetic diminishing Musharaka that will behave like a normal mortgage for the borrower but will provide returns to investors which are comparable to buy to let property
Synthetic Diminishing Musharaka (contd..) •Synthetic Musharaka is based on the idea of perpetual investment of rent & principal repayments into further properties. •As the properties will multiply, investors will gain from additional rental yield’s and principal repayment from properties that didn’t constitute original property portfolio (snowball affect). •Our calculations have showed that such synthetic Musharaka portfolio will generate returns far in excess of diminishing Musharaka and buy to let investment. With the added advantage that it will exactly behave like a normal mortgage product for the borrower. With the added advantage to the investors that risks (buyer default/property vacancy etc) will spread across large number of properties. (i.e. In addition to the properties originally invested in). •The risk of synthetic Musharaka portfolio will correlate to wider property market and buy to let investments and shall not create any additional risk for the investors or the borrowers. •Please refer to appendices & detailed model and calculations.
Investor: Buy to let vs. Diminishing Musharaka Investment • Buy to let is normally a leverage investment which is financed by mortgage. •Interest is paid on leverage portion, which is funded from rental returns. •Over the life of mortgage, majority of rent is used to pay mortgage (principal plus interest) payments with little or no profit accruing to the investor (after tax, maintenance and charges). •However tenants who effectively pay the mortgage never owns the property. •Its can thus be said that investor return at the end of mortgage period is a fully owned property that can either be sold or further rented. •In diminishing Musharaka investor get back principal, rent & share of increase /decrease in property price in proportion of their outstanding (diminishing) ownership. They don’t own the property at the end of the investment period. Tenant gets the ownership of the property. •Buy to let investment yield higher returns as compared to diminishing Musharaka.
Appendix A: Synthetic Musharaka Borrower ISLAMICMUSHARIKABUTNOCAPITALAPPRECIATION CHARGEDTOBORROWER Property cost 500,000 Assumptions: Total Rental Income 295,092 a) Profitis calculated as rental value in proportion of ownership Total Payment 795,092 b) Annual rental yield % 4 Period 25 Years c) Annual % increase in rent 2 d) Noincrease in property value charged toborrower Total MonthlyInstallment Princpal Repaymentpermonth 1,667 Monthly Rent 983.64 Monthly Installment 2,650.31
Appendix B: Buy To Let Investment BUY TO LET INVESTMENT Investment/deposit - Interest Rate 3.80% Property Cost 500,000 Starting Annual rent % 4 Annual % increase in rent 2 Annual % increase in property value 3 Interest Expense 275,000 Rent 640,606 5% agent fee 32,030 Repair& maintenance etc 25,000 Saving from rent after capital repayment 191,424- Property value at the end of 25 years 1,016,397 Total Gain after 25 year's 824,973 Gain is mainly a property worth £1M.
Appendix C: Ordinary Mortgage
Quran on Interest • And God has permitted trade and forbidden usury (riba) (Quran 2:275) • O those who believe, fear God and give up what still remains of the usury if you are believers. But if you do not, then listen to the declaration of war from God and His Messenger. And if you repent, yours is your principal. Neither you wrong, nor be wronged. (Quran 2:278-279) • The Apostle of God cursed the one who collected usury (riba), the one who paid it, the two witnesses to the transaction and the one who recorded it. • Musharaka is an Islamic way of finance wherein a business partnership is created instead of a lender- debtor relationship. Each party shares in both the profit and the risk of the business. Lender will gain profit from the business' success rather than from the interest charged from the loan.
Key Considerations • A technology platform that allows investors to make indirect investments in property, and subsequently sell those investments, for which we charge a one-off fee of 2% at the point funds are invested. • The value of investment can go down as well as up. Forecasts are not a reliable indicator of future performance. Gross rent and dividends may be lower than estimated • Monthly Rental Value will be established on the basis of rental/lease rate of a similar house in similar area. • Member occupant will be responsible for house insurance, repairs and maintenance. • Member occupant will be responsible for paying registration charges at the time of property transfer • The taxable profit made by the SPV is subject to corporation tax, which the SPV will pay directly to HMRC. The corporation tax rate in the UK is currently 20%, however following the 2015 summer budget this is set to reduce to 19% in April 2017, and to 18% in April 2020. In addition, should the property price increase, corporation tax is payable on the gain on disposal. This future corporation tax liability is recognised in the valuation of the SPV and is called deferred tax. • Post April 2016, the 10% dividend tax rate will be abolished for UK taxpayers from April 2016, and a £5,000 annual dividend allowance will be introduced instead. Anyone who invests less than around £150k in share investments will pay no tax on their dividends (assuming a dividend yield of approximately 3%). This means investors will pay less (if any) tax on their dividends. • Stamp Duty Reserve Tax is an amount payable to HM Revenue & Customs for acquiring shares in property investments on the secondary exchange (i.e. Resale opportunities). The amount payable is 0.5% of the cost of those shares. • Each property will be owned by SPV (Special Purpose Vehicle) which will be a public limited company, benefits of which are: • Investor will always know which property he/she is investing in • Potential tax savings • Changing ownership is easy • SPV acts as a separate legal entity to sponsor firm hence isolates financial risks in the event of bankruptcy

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Islamic housing investment finance.v3

  • 1. Interest-Free Housing & Investment Based on “Diminishing Musharaka”
  • 2. Mission Statement • As per European Council for Fatwa and Research's Resolution 2/4 on "Permissibility of conventional mortgage under necessity“ its obligatory on all Muslims to do their utmost to seek Islamic alternatives to fund their housing need • We offer an alternative solution to the conventional mortgages to enable Muslims in UK to Purchase house with non-riba loan • This will also provide Muslim investors an opportunity for interest-free returns at par or better than conventional returns on investments incl. buy to let investment.
  • 3. How it works ? • Win win situation for both borrower and lenders as borrowers will pay rent equivalent to market price and lender will get return at par or better than traditional investment incl. buy to let • Buyer selects a property for housing and investors will fund the purchase. • Multiple investors will fund the property (Crowd Funding) • Investors and buyer share returns through monthly rental income based on their respective shares in the house • Buyer’s will pay predetermined installment & share of the rental income to increase his ownership in the house • Over a predefined duration buyer’s share will grow to 100% and investor’s share will reduce to zero at which stage the title deed of the house is transferred to the buyer
  • 5. •In MORTGAGE borrower pays interest on outstanding principal amount and capital in total •Lender has no share in increase or decrease in the value of the property •Monthly mortgage instalments are largely fixed (except for change in interest rate which can be fixed for a long period). Also the overall cost of financing is largely know and fixed •In a true diminishing Musharaka, investors receive rent in proportionate of their outstanding investment (principal amount) •Investors also receive share of increase in property value (or share loss) •As a result monthly instalment and over all price to be paid by the buyer is variable. Buyer may face a continuously changing goal post as price keep changing •It may take longer to pay •Synthetic Musharaka is based on the idea of perpetual investment of rent & principal repayments into further properties. •As the properties will multiply, investors will gain from additional rental yield’s and principal repayment from properties that didn’t constitute original property portfolio (snowball affect). •Synthetic Musharaka portfolio will generate returns far in excess of diminishing Musharaka and buy to let investment.
  • 6. Perpetual investment 1,350,000 1 2,403,250 2 3,743,733 3 - 4 New investment Year As per target, after year 3, organic growth will drive investors share, without any new investment from investors, portfolio will continue to grow
  • 7. Short and long term Plan • It will be CROWD FUNDING model to allow investor to start investing from as little as £50. • Mass contact campaign to be launched through various platforms like web, mosques and through community leaders. • Board of advisory will be appointed to foresee investment portfolio. • Buyers will be served on 1st come 1st serve basis. • Investors will be allowed to liquidate there shares through secondary market. • Investor profit and capital will be reinvested in portfolio, organic return will allow us to buy additional property just using reinvested amount • Recycling of return will create a loop where original investment will fund new properties. • Once enough funding will be generated, this fund aims to build own houses at discounted price for community. • Inshallah, this platform will not only be financial tool but will serve community to produce leaders. • We will be funding peoples to study in oxford & Harvard, will produce technology leaders, thinkers and politicians to shape and influence the society.
  • 8. FAQ • How is it different to Al Ryan bank • Al Ryan bank don’t share profit and loss, they only interested in their capital repayment and profit, due to their bench marking borrower usual pay more than market rent • Can investor withdraw their money • Yes, investor can offload their share of the fund, they can sale their share on this platform • What if buyer couldn’t keep re payment • House will be repossessed and if no other takers available, it will be off loaded in the open market, profit and loss will be split between investors and buyers proportionally • Is it open for whole UK • For few years, our focus is on South East only • Is their any restriction on buyer or investors • Buyer has to qualify through usual credit check and affordability test, investment is open for EU residents only • Special purpose vehicle • It is not possible for more than four people to be listed on a UK land registry deed, as such each property in this fund will be owned by a special purpose vehicle (“SPV”), which will be UK Limited Company, that you can then in turn buy shares in. There is a different SPV for each and every property; therefore you will always know that you are investing in a specific property chosen by you. • What if this fund dissolve • Each property investment will be separately ring-fenced from the assets and liabilities of, as well as any other property investments on the platform. • If this fund fall into financial distress an alternative manager could be appointed to continue management of the assets in accordance with the terms of investment. • Any funds held in your account not invested in property will held in a client monies bank account in accordance with FCA rules. Separate bank account that is ring-fenced from the monies of this fund and will be returned to investors in the event of fund falling into financial distress
  • 10. Borrower: Diminishing Musharaka vs. Mortgage •In general diminishing Musharaka tends to be more expensive then traditional mortgage. •In mortgage borrower pays interest on outstanding principal amount and capital in total •Lender has no share in increase or decrease in the value of the property •As a result monthly mortgage instalments are largely fixed (except for change in interest rate which can be fixed for a long period). Also the overall cost of financing is largely know and fixed. Buyer has a certainty of paying debt within a certain time period. •In a true diminishing Musharaka, investors receive rent in proportionate of their outstanding investment (principal amount). •Investors also receive share of increase in property value (or share loss). •As a result monthly instalment and over all price to be paid by the buyer is variable. Buyer may face a continuously changing goal post. It may take an extended period of time to completely own the property.
  • 11. Synthetic Diminishing Musharaka • A true commercially viable Islamic house financing product should replicate characteristics of a traditional mortgage from the perspective of borrower but should provide returns to investor equivalent to or exceeding buy to let property investment. •Borrower should only pay fixed monthly instalment and should have ability to repay all the principal over a fixed period of time •Borrower should retain full risk/reward relating to increase/decrease in value of the property. •On the other hand, investors should get returns comparable to buy to let investments with full exposure to increase/decrease in the value of the property. •This will give rise to truly commercially viable Islamic product. • We have proposed the idea of synthetic diminishing Musharaka that will behave like a normal mortgage for the borrower but will provide returns to investors which are comparable to buy to let property
  • 12. Synthetic Diminishing Musharaka (contd..) •Synthetic Musharaka is based on the idea of perpetual investment of rent & principal repayments into further properties. •As the properties will multiply, investors will gain from additional rental yield’s and principal repayment from properties that didn’t constitute original property portfolio (snowball affect). •Our calculations have showed that such synthetic Musharaka portfolio will generate returns far in excess of diminishing Musharaka and buy to let investment. With the added advantage that it will exactly behave like a normal mortgage product for the borrower. With the added advantage to the investors that risks (buyer default/property vacancy etc) will spread across large number of properties. (i.e. In addition to the properties originally invested in). •The risk of synthetic Musharaka portfolio will correlate to wider property market and buy to let investments and shall not create any additional risk for the investors or the borrowers. •Please refer to appendices & detailed model and calculations.
  • 13. Investor: Buy to let vs. Diminishing Musharaka Investment • Buy to let is normally a leverage investment which is financed by mortgage. •Interest is paid on leverage portion, which is funded from rental returns. •Over the life of mortgage, majority of rent is used to pay mortgage (principal plus interest) payments with little or no profit accruing to the investor (after tax, maintenance and charges). •However tenants who effectively pay the mortgage never owns the property. •Its can thus be said that investor return at the end of mortgage period is a fully owned property that can either be sold or further rented. •In diminishing Musharaka investor get back principal, rent & share of increase /decrease in property price in proportion of their outstanding (diminishing) ownership. They don’t own the property at the end of the investment period. Tenant gets the ownership of the property. •Buy to let investment yield higher returns as compared to diminishing Musharaka.
  • 14. Appendix A: Synthetic Musharaka Borrower ISLAMICMUSHARIKABUTNOCAPITALAPPRECIATION CHARGEDTOBORROWER Property cost 500,000 Assumptions: Total Rental Income 295,092 a) Profitis calculated as rental value in proportion of ownership Total Payment 795,092 b) Annual rental yield % 4 Period 25 Years c) Annual % increase in rent 2 d) Noincrease in property value charged toborrower Total MonthlyInstallment Princpal Repaymentpermonth 1,667 Monthly Rent 983.64 Monthly Installment 2,650.31
  • 15. Appendix B: Buy To Let Investment BUY TO LET INVESTMENT Investment/deposit - Interest Rate 3.80% Property Cost 500,000 Starting Annual rent % 4 Annual % increase in rent 2 Annual % increase in property value 3 Interest Expense 275,000 Rent 640,606 5% agent fee 32,030 Repair& maintenance etc 25,000 Saving from rent after capital repayment 191,424- Property value at the end of 25 years 1,016,397 Total Gain after 25 year's 824,973 Gain is mainly a property worth £1M.
  • 17. Quran on Interest • And God has permitted trade and forbidden usury (riba) (Quran 2:275) • O those who believe, fear God and give up what still remains of the usury if you are believers. But if you do not, then listen to the declaration of war from God and His Messenger. And if you repent, yours is your principal. Neither you wrong, nor be wronged. (Quran 2:278-279) • The Apostle of God cursed the one who collected usury (riba), the one who paid it, the two witnesses to the transaction and the one who recorded it. • Musharaka is an Islamic way of finance wherein a business partnership is created instead of a lender- debtor relationship. Each party shares in both the profit and the risk of the business. Lender will gain profit from the business' success rather than from the interest charged from the loan.
  • 18. Key Considerations • A technology platform that allows investors to make indirect investments in property, and subsequently sell those investments, for which we charge a one-off fee of 2% at the point funds are invested. • The value of investment can go down as well as up. Forecasts are not a reliable indicator of future performance. Gross rent and dividends may be lower than estimated • Monthly Rental Value will be established on the basis of rental/lease rate of a similar house in similar area. • Member occupant will be responsible for house insurance, repairs and maintenance. • Member occupant will be responsible for paying registration charges at the time of property transfer • The taxable profit made by the SPV is subject to corporation tax, which the SPV will pay directly to HMRC. The corporation tax rate in the UK is currently 20%, however following the 2015 summer budget this is set to reduce to 19% in April 2017, and to 18% in April 2020. In addition, should the property price increase, corporation tax is payable on the gain on disposal. This future corporation tax liability is recognised in the valuation of the SPV and is called deferred tax. • Post April 2016, the 10% dividend tax rate will be abolished for UK taxpayers from April 2016, and a £5,000 annual dividend allowance will be introduced instead. Anyone who invests less than around £150k in share investments will pay no tax on their dividends (assuming a dividend yield of approximately 3%). This means investors will pay less (if any) tax on their dividends. • Stamp Duty Reserve Tax is an amount payable to HM Revenue & Customs for acquiring shares in property investments on the secondary exchange (i.e. Resale opportunities). The amount payable is 0.5% of the cost of those shares. • Each property will be owned by SPV (Special Purpose Vehicle) which will be a public limited company, benefits of which are: • Investor will always know which property he/she is investing in • Potential tax savings • Changing ownership is easy • SPV acts as a separate legal entity to sponsor firm hence isolates financial risks in the event of bankruptcy