The house prices for UK rose by 1.11% in the year 2011, in accordance to the National statistics. However in line with inflation-adjusted computations, the house prices really dropped by three per cent. This is in line with a consistent drop in the annual prices of houses in the UK in the past 3 quarters. In the year 2009, the house prices for UK started to drop owing to credit crunch globally. However, in 2010 the house prices started to recover but in 2011 the house prices fell again. The national statistics portray that the prices of the houses increased slightly in 2012. The prices of the houses have been fluctuating over the recent period from the statistics and national statistics that we have examined above. The prices of the house based on the analysis of the weak economy of the country, restricted mortgages and reduced consumer confidence and increased inflation rates. Based on the above factors a forecast of the real gain in the real property can be forecasted as a likely drop in the house prices.
Financial convectional laws have a narrow IFIs activities scope that is within the convection range (Visser 67). In Islamic finance, lack of banking law and courts' agreement enforcement requires extra costs and effort. Therefore, company and banking law in many countries requires modification to enhance the playing level field for IBs. Furthermore, Islamic finance contracts require Shari'ah compatibility and acceptability under the main legal regimes like civil law and common law systems.
Currently, IFIs nature is subject to similar infrastructure, which applies to financial conventional institutions taking IBs and IFIs characteristics consideration and Islamic compliance review. Islamic finance and banking framework is a necessity for an accounts holder (such as current accounts and investment accounts), large community, shareholders and other stakeholders (Hassan 94). The public and regulatory regime enhances interest in the systematic risk aversion and banking system efficiency, which leads to bankruptcy.
Likewise, IFS and IB have no interest of ensuring that banks are financially sound. However, it ensures that banks' financial internal involvement are strictly in line and accordance with Shari'a, which is a financial system, that is sound and key in achieving political and economic stability for underdeveloped and developing economies. Otherwise, financial systems that are weak can break down in economic periods of distress, resulting in other economies, and damaging financial systems that are healthy. Given this, regulatory and authoritative legal bodies are a necessity in any country and are required so as to enhance financial systems' key elements (Warde 87).
These key elements include structural regulation, which are capital adequacy measurement and portfolio riskiness, insurance scheme deposits setting and regulatory standards enforcement regarding to information disclosure. The Islamic financial industry like any other conventional financing, needs support by a supervisory and strong regulatory framework. This ensures that IFIs operation are sound and unsusceptible to banking systems. Apart from regulatory and common legal framework, in a majority of jurisdiction, IFIs is supposed to be governed by similar regulatory framework. This is an operation application and conventional finance reinforcement geared towards Islamic accounting and legal framework and standards (Ayub 56).
Home Finance Loan packages by Islamic banks in the UK
A conventional financial framework is based and premised on a debtor-creditor- interest-base relationship. It is put in place to mitigate and assess risks that arise from financial loan-based transactions. However, Islamic finance differs with other finance systems with regard to underlying interest prohibition philosophy. This shapes financial transactions, which have Islamic finance risk characteristics. The Islamic finance has specific operations that are connected with risks and need identification, to ensure adequate mitigation of such risks with regard to prudential regulation. This, in turn, ensures greater disclosure and transparency as well as independent and strong judicial systems as reinforced by the robust IFIs Shari'a governance (Warde 98).
Since all the UK financial institutions and banks operates in an interest regulatory system, there is a significant challenge in developing and delivering Islamic non-interest based financial services and products, which caters for Muslims' observant unique needs. Moreover, Islamic financial systems are still at the infancy stage in the UK. It has faced numerous challenges and problems commonly identified and referred to as operational challenges (Hassan 143).
Interest in the financial sector is justified through the classical viewpoints advanced by economist such as Malthus, Ricardo and Adam smith. On the other hand, the neo-classical school put emphasis on supply and demand savings in which the interest is at the point where both curves intersect. However, the Keynesian approach, which is close to Islamic approach, refutes classical and neo-classical arguments that interest rates increase would result to increased investment and saving. The Islamic banks main goals are economic growth and employment, equitable wealth distribution, money value stability and investment savings and mobilization. Islamic financial instruments are based on sharing modes, sales modes and leasing modes (Warde 67).
Islamic financial instruments have two distinctive leasing components. This is a feature contract characterized by progressive rental payments, which tends to decrease as bank equity or share units diminishes gradually. This financing mode is commonly used in housing finance, car leasing, high-valued equipment, purchasing and retail commercial (Hassan 78). The rental justification is risk based in that the banks bears risks concerning assets ownership, wear and tear, market recession and asset demand variables. Islamic housing finance is a combination of contracts involving lessee and lessor with unquestionable permissibility and separate validation.
These contracts have received criticisms with regard to repair costs, which the Islamic law does not allow as it should be settled by the lessor. Similarly, if the repair loss is borne by the lessee then this will result to rent increase; an amount that is not determinable in advance (that is Gharar). Additionally, an asset usufruct is inexistent and intangible. This is a future stream use extension. If there is a lessee future usufruct reduction, this will contravene justice principle of charging the same rent and/ or forcing the lessee to buy that particular asset (Warde 132).
This happens especially during negative housing market equity, when the house value falls due to either supply increase or demand decrease. The future asset sale could raise conditional agreements' issue that are not valid according to Islamic law's unanimity of jurisprudents and scholars. Theoretically, there is a lessee's right to breach the agreement acknowledgement when the property is destroyed. However, all Islamic financial and banking practices appear to overlook this situation and in turn transfer the repair cost burden to lessee (Ayub 87).
Diminishing Musharakah Package or a Conventional Repayment Mortgage
An Islamic financial arrangement is typically known for providing finances for home purchase. In this case, IFI resells and buys property to customers at an agreed profit through deferred payment over a stipulated time frame. This requires twice legal title transfer; that is by customer and subsequently by financier; hence, this means stamp duty double pay. This double payment of stamp duty exists in Islamic housing financial operation. This is an obstacle since interest receipts and payments are forbidden strictly. Islamic housing finance involves a financier who buys and resells the property and does an installment payment collection for capital repayment. Instead of interest charging, the financiers resells at the actual price, but charges an additional rent/profit over a specified time period. There is a double stamp duty transfer since there is double property transfer. Re-financing bring problems to the old lender since he sells to new lender; thus, incurring another stamp duty charge (Hassan 97).
United national bank is the bank providing Islamic housing financial solution in Wales, Scotland and England while other finance providers like IBB, HSBC Amanah, Manzil and Al-buraq offers mortgage to Wales and England only. These banks are based on diminishing musharka and ijara principles. According to Hassan, the client pays deposits and agreed rental acquisition contribution and a maximum contract period of 25 years (94). The mark-up has a relationship with labor that is similar to profits made by the bank through the UK labor market.
Conventional mortgages and Islamic mortgages are within Wft scope. Wft scopes demands adherence to the rules and requires provision of product relevant information; for example, risks, financial leaflets, credit prospectus and quotation. In an Islamic mortgages case, the provider or adviser are not subjected to Wft duty-of-care mortgages. Therefore, there is less consumer protection in regard to Islamic mortgages compared to conventional mortgages (Warde 112).
