5 Misconceptions about Islamic Finance
Despite the steady growth and rising popularity of Islamic home finance, many consumers still hold onto tightly held misconceptions surrounding Islamic finance.
Whether it’s because of an unclear understanding of the financing industry in general or because of misinformation surrounding Islamic mortgage alternatives, potential homebuyers often bypass potential savings. Homebuyers can benefit from being accurately informed about Islamic home finance.
Here are five common myths and facts to help home buyers identify whether Islamic home financing is right for them.
Myth #1: Islamic finance is for Muslims only.
Fact: This is one of the most common misconceptions; however, Islamic home finance is a mortgage alternative that is available to anyone. While it is based upon a more ethical framework rooted in the Islamic faith, it shares the same economic objectives as a conventional mortgage. Islamic financing is available to Muslims and non-Muslims alike, and it is gaining popularity. Several major banking groups have even begun to offer Islamic financial products and services, although a company founded on Islamic principles can offer a more authentic product.
Authentic Islamic finance focuses on ethical and social values that build in unique advantages that have actually begun to appeal to more consumers of other faiths. Co-ownership is a more equitable arrangement than a conventional mortgage loan right from its very foundation: It is a partnership between the financier and home buyer rather than the debtor-lender arrangement of a mortgage. Guidance Residential’s co-ownership model also shares some of the risks of homeownership with the home buyer, as well as capping or eliminating some fees that have been historically common with traditional mortgages.
Based on its merits alone, aside from the religious element, this approach is gaining appeal. The market is truly open to everyone.
Myth #2: Islamic finance is drastically different from a conventional mortgage.
Fact: Islamic finance is better explained as taking a different approach to conventional finance. As required by Islamic law, it is asset-based, not currency-based.
Due to the principles that underpin Islamic finance, the rate of return is based on the actual asset or investment and not the “interest” on the money loaned – as interest (or the Islamic legal term “riba”) is not compliant with Islamic principles. The financier, however, may make a profit or return on its investment.
Scholars have confirmed that it is acceptable for an Islamic financier to structure its products in a way that resembles more conventional methods on the surface, even though the foundation is completely different. This facilitates regulation by government bodies and makes it easy for customers to compare their options.
Myth #3: Islamic finance is more complicated than traditional mortgages
Fact: Home financing, in general, can seem complicated to the average consumer – especially to consumers that are new to the concepts, terms, and practices of the financial industry. However, working with a company that provides support and guidance throughout the process of financing or refinancing a home is a simple solution.
Guidance Residential, the #1 U.S. Islamic home finance provider, assigns a professional Account Executive to each client. The Account Executive works with each client to answer questions and provide education on all aspects of the financing process, including the differences and similarities between Islamic and conventional finance. Account Executives are skilled and knowledgeable and understand that clients, especially those purchasing their first home, need a trusted source for one of the largest financial decisions they will make.
Guidance Residential also offers convenient online tools such as for those who prefer to find quick answers on their own. These tools range from calculators that can provide instant estimates, to the entire application process, which can be fast-tracked online.
Whether online, on the phone, or face to face, Guidance Residential prides itself on customer service. It’s the Guidance Difference.
Myth #4: Islamic finance is more expensive than conventional finance.
Fact: In a word, no. Decades ago, when Islamic home finance was first becoming established, pricing did tend to be higher. However, as the industry grew, the cost of Islamic home finance fell in line with conventional mortgages. Today, Islamic home finance offers competitive rates that make it a viable alternative to a mortgage loan.
Myth #5: Islamic financing cannot compete in the marketplace
Fact: Before Guidance Residential opened its doors, its founders spent three years on research to develop a model that was entirely authentic to Islamic financial principles and then to pave a way for it to work smoothly within the U.S. regulatory system.
That groundwork paid off, and the company has grown steadily under the continued oversight of both regulars and a board of independent scholars of the financial principles of shariah law.
Today, Islamic home finance is thriving and growing rapidly in the United States, with Guidance Residential as the #1 U.S. Islamic home finance provider.
Ready to Make Your Move?
Guidance Residential’s co-ownership model of Islamic home financing remains the #1 U.S. Islamic home financing provider, with more than 40,000 families assisted over more than 20 years. Learn more and get started on your home finance journey today.
Your Guidance Residential Account Executive is here to help with any questions. Looking to refinance or purchase? Have a friend or family member who is looking for a home? Call 1.866.Guidance, or start an application today.
Originally published July 2021, updated April 2024.
