What are bridging loans?
Bridging loans are mainly used to borrow money for shorter time duration. Primarily used by individuals who want to purchase real estate.
The example in this regard is to ensure that finance is arranged in order to facilitate a purchase in the case where the individual is short of funds. Bridging loans are mainly used in order to ensure that property transactions can be carried out in a smooth manner without any liquidity issues that might exist in this regard.
There are two main types of traditional bridging loans, which can either be closed or open. As far as closed bridging loans are concerned, they have a fixed repayment date. However, open bridging loans are expected to be settled within a time duration of one year.
The Necessity for Shariah Compliant Bridging Loans
Over the course of time, Islamic banking has increased in the UK considerably due to it being a popular choice amongst Muslims since it complies with Islamic ethical principles of interest free and is a viable choice for the growing Muslim population in the United Kingdom, and therefore, this makes it a viable option for those who want to avoid interest on religious grounds or otherwise.
How are Shariah-compliant bridging loans different?
As far as Shariah-compliant bridging loans are concerned, it can be seen that they are mainly offered by banks that operate under Islamic finance principles.
Under these principles, banks are not allowed to charge interest against the Islamic bridging loan. In the same manner, they are not permitted to deal with businesses that are involved in activities prohibited in Islam. They include alcohol, gambling, and addiction causing products. Hence, they operate under the Islamic Shariah concept and do not take any interest. However, they are available to Muslims and non-Muslims equally.
Shariah-Based Loan Provider: The Pioneer
Despite the fact that there are a couple of institutions that offer Islamic bridging loans today, yet UK’s first Shariah-compliant bridging lender was Offa. They initially provided Shariah-compliant residential and commercial bridging facilities with a maximum finance-to-value (FTV) of around 75% and 65% respectively.
Over the course of time, they have a further plan on introducing refurbishment, stretched development, planning and a shared risk ethical finance facility. This can be referred to as a Shariah-compliant equivalent of a joint venture. The horizon of shariah based bridging loan providers is further expected to spread their services to UK residents, expats, and international clients who are interested in these services.
Most service providers in this case offer services to individuals, sole traders, partnerships, limited companies, LLPs and offshore SPVs. However, it should be noted that they charge procuration fees of up to 2%, which is mainly payable to introducers.
Clifton Private Finance
Clifton Private Finance is another Islamic bridging finance provider in the UK. They offer bridging finance from £100,000 to £10m. Furthermore, Finance to Value (FTV) is up to 75%. In the same manner, Net finance to cost (FTC) is also offered up to 75% in this regard. The profit rate is 1%, and the term that is offered 1 to 12 months. Further, it also facilities the customers by declaring that there will be no early repayment charges in this regard. The finance is offered individuals, Limited Companies, LLP’s and Partnerships. It is also available to properties in England & Wales. This is also in compliance with universal Islamic Finance Principles.
Gatehouse Bank is another provider for Shariah Complaint Bridging. Given the fact that Offa has continued to be an essential industry leader in Shariah Loans, they have established collaborations with to facilitate Shariah Based Bridging loans for UK residents, at large.
FORMS OF SHARIAH LOANS OFFERED BY ISLAMIC BANK
There are a number of different types of Shariah-compliant loans that are mainly offered by Islamic banks and institutions. Banks, in this case, may also provide financing options to their customers to purchase through, which further enables them to have access to funds, without having to bear interest cost on the purchase. However, there is a vast majority of Shariah-Compliant Bridging Loans that are offered. These products are described below:
In Shariah-compliant bridging loan options, there are individual banks that provide a lease-to-purchase concept to facilitate home financing. This is highly important to assist customers in enabling them to get good deals for the real estate that they might be interested in purchasing. Therefore, it includes elements of systems of Murabaha (cost + financing), Ijara (finance institute leases the asset at an agreed rental fee for a specific period), as well as Musharaka (joint enterprise). Using these elements, they might additionally be able to avail their bank’s services, which can facilitate them to make house-related purchases.
Shariah Related Loans for Construction
Loans and finances for construction is another highly important aspect which is vital to ensure that there is Islamic compliance with the said loan acquisitions. As far as construction-related industries are concerned, it can be seen that compliance with Islamic principles has now been embedded into this particular stream, predominantly owing to the reason that the basis of financial costs is mainly reliant on profit-and-loss sharing.
Therefore, it can be seen that Shariah-based Bridging Loans have been increasing on a continual basis in the UK. With a number of service providers in this regard, there is still room for plenty of innovation in the industry. This can significantly be helpful for banks and financial institutes to meet their targets and increase the overall market for Shariah Related Financing.
As a matter of fact, the existing providers do not have a lot of product differentiation to offer, and therefore, this creates a gap in the market for someone to create an impact, and introduce products that can benefit the growing Islamic population, and fuel the industry to promote a higher number of property-related transactions.