Islamic LARIBA Jurisprudence
Toronto, Nov. 26, 2007
The Model Used to Finance the house According to the rules of Islamic LARIBA
Jurisprudence is the Lease-To-Purchase (LTP) Model. It NEVER start from the
cost of money, which is usually called interest on money. Here is a summary
of how it works:
We encourage homebuyers to strive to save at a young age for their children in order that a large down payment is made when they purchase a house.
Do you know that with a 30-year interest mortgage model, all your payments
for the first 6 to 7 years are INTEREST? Your principal stays the same. Do
you also know that the average American family changes its mortgage once every
5 to 6 years? The net result is that you will live with debt and interest
for the rest of your life.
The best financing arrangement should not exceed a term of 7 to 10 years and should be for no more than 65 to 70% of the home price.
Finance Company start by calling around to find the monthly rental/lease rate of a similar house by contacting real estate agents. They request the client to do the same. The client and company finance officer compare the results of the survey and agree on a monthly lease/rental rate. We start from the utility value of the vehicle. This concept is called "Marking the item to the Market." Interest rates are the same through the Canada regardless of the economic condition of the city, locality or state. When they mark things to the market, this directly reflect the utility that is a function of the economy of an area.
The model calls for the financing entity to purchase the property jointly with the client and in a back-to-back agreement, the client purchasing the shares of the financing entity at cost. In doing so, there is no time-value of money. The client owns title to the property with the Company holding a first-position lien. This structure also conforms to requirements of the banking regulators. The client agrees to buy back the Company’s portion over a period of time. It is called Repayment of Capital (R-of-C, pronounced ‘ROFSEE’) to the company.
Return on Capital (R-on-C, pronounced ‘RONSEE’) is calculated based on a declining equity model based on the property’s economic value (utility). This value is measured by the property’s lease value as explained in item 1 above. Using this model, we calculate market value of the house, not to a predetermined interest rate like LIBOR or Prime Rates.
The financing agreement consists of two parts: the first is a loan agreement in which the client returns the capital to the company (Return on Capital); the second is a lease agreement based on an agreed lease rate, calculated based on the declining equity stipulated by the Return-of-Capital pay back agreement.
Based on the agreement detailed above, a promissory note is drawn. It details the monthly payments representing the Repayment OF Capital portion and the Return ON Capital (lease) portion. To comply with the U.S. regulatory requirements and U.S. banking system rules, the monthly payment streams are plugged into a traditional amortization program to calculate an implied interest rate. This allows LARIBA to satisfy the "Truth-In-Lending" and "Full and Complete Disclosure of Implied Interest Rate" laws as required by Canadian Banking and lending requirements. The models, and agreements used for all transactions, are exclusively developed by the Company to provide services for the clients seeking Islamic financing products.
Kuljit Singh, Accredited Mortgage Professional
Mortgage Alliance AKAL Mortgages Inc. at 905-290-2525 x221 or email
at info@akalmortgages.com.