When Muslims and other people interested in buying a home or getting involved with other legal matters want to do things according to Sharia law, they look to a trust to make sure their manner of Islamic finance deal is free of Riba.

Understanding all about this legal tool as it pertains to an Islamic loan is a good practice.

Here’s a brief overview of what you’ll need to know about a trust before you get involved with one.

First and foremost, a trust is a powerful legal tool that establishes the rights and obligations among the parties involved. It sets the parameters for the beneficiaries, settlers and trustees. There are various reasons for people to need this vehicle—some wealthy people use trusts to their advantage while others use them to care for people with special needs, and still others find them of use to protect assets from creditors and even safeguard your assets for future generations. Other people use this vehicle to ensure their Islamic finance transactions stay in accordance with Sharia law by staying away from Riba.

In a nutshell, the purpose of a trust is to establish a legal entity that will have control over assets and finances. These work well combined with Sharia law by providing a framework for Muslims to buy property without borrowing money from big lending institutions and paying interest on the loan amount itself.

Hence an Islamic loan has found one of the solutions is using a trust to avoid the payment of interest on the money borrowed directly. Under this process, an individual trust holds title to the property and the technique is called Lease to Purchase” (Ijara wa Iqtina).

Under this type of Islamic finance, a form of interest free financing is created that upholds Sharia law while still working within a more traditional Western framework. This program using a trust is often the perfect solution for Muslims that want to follow the tenets of their beliefs while living in areas that are non-Sharia law jurisdictions.

The  BF Ijarah model sets up a lessor-lessee arrangement rather than a creditor-debtor relationship – so it is a very useful Islamic finance method.

Loan owner clients borrows money from a financial institution at a fixed interest rate, our new lease contracted BF  ijara model it Sharia compliant?

Firstly, in Islam, the client is only responsible for the contract when entering into contract with lender. However, what the lender does after that is not the responsibility of the client. If I rent an apartment, I will pay my monthly rent. If the apartment complex uses my money to pay off their interest-bearing loans, I will not be held responsible. Secondly, BF enters into a separate Shariah compliant contract on the side. Rent on money is Riba (haram) but rent on property is rent, which is halal.

  • We will create a trust for your and the trust will purchase the property (funds from the investor) and each month you will pay rent to the trust. A portion of that rent will go towards your ownership until you have 100% equity.
  • The property will be held in a trust. So let’s say your property is located on 123 Market St, the name of the trust will be 123 Market St Revocable Trust.
  • The property is purchased by the trust and then leased to you. BF Payment processing will than manage the payment processing of rent from you to the trust.
  • You will be signing a lease to own agreement where at the end of the loan term you agree to take over 100% ownership.
  • The beneficiary initial is you, so when the house is paid off, the property will go under your name, but if you wanted the property to go under your mom’s-dad’s or childrens or other partners name, you can have her as a beneficiary.
  • There is also what is called a successor beneficiary that can only obtain the property if you pass away. Many people add on this beneficiary if they have children, so that the property will automatically to their children without having to have a will.
  • What you have to realize is that this is a lease to own transaction, not a regular rent or lease. After the transaction is done, you will own a house, with a regular lease agreement.
  • You will be able to get tax credits as a homeowner, you can rent the property out, you can sell the property, renovate as a homeowner can.
  • In our transaction, in the event of a default, we give the bank “An Assignment of Rents and Leases”, this gives the bank the option of collected under the lease agreement.
  • If the customer has to go to another city/province/country for a few years, it can be rented out, the customer is the grantor of the trust, so they have control if they want to rent it out.
  • If you want to sell the house; Before the closing of the selling of the house, all the title and ownership will be transferred to you, and then transferred to the buyer. So on paper you will be the one selling the property. You will be required to pay off whatever is left on your loan balance. A profit gained from the sell is 100% yours.

NOTE; The exact process of conversion is proprietary; so we do not share the exact process with anyone. As far as the Islamic viability, you basically end up in a Sharia Compliant Ijara transaction.

If you wish to read the primary documents individually, we will send a Non-Disclosure Agreement you can sign before we forward the files about your Islamic loan.