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<\/p>\nWhen Wildan Al Hazmi decided to buy an investment property several years ago he did not even consider a conventional loan.<\/p>\n
Instead, he opted for a niche option that caters to a growing segment of Australia’s population.<\/p>\n
Mr Al Hazmi, a father of two in Melbourne, said he took out Islamic financing because of his Muslim faith.<\/p>\n
“The reason for using Islamic financing is the peace of mind that comes from complying with Islamic principles such as avoiding riba (interest) and sourced from halal products,” he said.<\/p>\n
Borrowers do not need be Muslim to access Islamic financing, but in Australia it is rarely the cheaper option.<\/p>\n
So how does Islamic financing actually work? How is it different from traditional loans? And if it is not cheaper why do people choose it?<\/p>\n
Why some people are choosing this option<\/p>\n
Euis Amalia, the professor of Islamic economics at Universitas Islam Negeri (UIN) Syarif Hidayatullah Jakarta, said Islamic transactions prohibited three things: riba (interest), gharar (speculative transaction), and maisyir (gambling activity).<\/p>\n
She said interest was considered “unjust and exploitative” because it created an imbalance between capital owners and borrowers, placing the most risk on the borrowers.<\/p>\n
Professor Amalia said, generally speaking, conventional banking primarily focused on profit generation while the Islamic economics system also “prioritises human and environmental welfare”.<\/p>\n
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Professor Euis Amalia said a popular Islamic financing structure was “Murabaha” or “risk sharing”. (Supplied)<\/p>\n
She said all financial transactions involved must be halal, meaning they cannot be linked to prohibited activities that bring more harm than good for society or the environment.<\/p>\n
This means those institutions are forbidden from investing in certain industries including gambling, alcohol and pornography.<\/p>\n
In the context of mortgages, transactions in Islamic finance must be based on a clear deal between the buyer and the seller, Professor Amalia said.<\/p>\n
“Islamic finance is governed by ethical principles like prohibiting exploitation and speculation, as well as income derived from such activities,” she said.<\/p>\n
How does it work?<\/p>\n
Professor Amalia said one popular Islamic financing structure was “Murabaha” or “risk sharing” where an Islamic finance service buys an asset \u2014 such as a house \u2014 and resells it to a buyer with a marked-up profit.<\/p>\n
The “profit rate” is benchmarked to market interest rates.<\/p>\n
Similar to conventional banking, Islamic financing includes fixed rate and variable rate schemes.<\/p>\n
If the mark-up is fixed, any decisions by the Reserve Bank of Australia to raise the cash rate would not affect the repayments once the contract is signed.<\/p>\n
The buyer would pay the financier in fixed instalments over an agreed duration, up to a decade, similar to the idea of a fixed rate in conventional banking.<\/p>\n
The moral foundations of Islamic banking<\/a><\/p>\n Islam is not the only religious tradition to have raised serious concerns about the ethics of interest, but Muslims have continued to debate the issue with vigour.<\/p>\n According to MCCA Islamic Finance and Investments, a provider of Islamic financing, while the Reserve Bank of Australia “does not directly regulate Islamic finance products, its policies influence the overall economic conditions in which these products are offered.”<\/p>\n “For instance, changes in the cash rate can affect the cost of borrowing for Islamic finance contracts,” its website said.<\/p>\n While a Murabaha agreement and a fixed-term loan can look similar, experts argue they are built on different structures.<\/p>\n Salaam is a Sydney-based company that provides home financing in compliance with Islamic principles.<\/p>\n “Interest is charged on lending money, while the profit rate is the agreed return from a sales contract under a real asset,” said Mas Johan Harris, the head of investment and product at Salaam.<\/p>\n Mas Johan Harris said the limited Islamic finance market in Australia had affected its affordability. (Supplied)<\/p>\n Another common Islamic financing structure is Ijarah Muntahia Bittamleek or the “shared ownership model”.<\/p>\n This is a structure in which the Islamic financier and the home owner jointly purchase the property, and the home owner then pays monthly rent, plus a profit margin, to the financier for the share they own.<\/p>\n Eventually the property is paid off and the homebuyer owns the property outright, similar to shared equity schemes.<\/p>\n This is the structure that Mr Al Hazmi used when he bought his two-bedroom investment property in Thuringowa, in Central Queensland.<\/p>\n Mr Al Hazmi bought this house in 2024. (Supplied)<\/p>\n He bought the house for $486,500 in 2023 and took out a 30-year variable rate instalment plan.<\/p>\n He pays around $2,500 every month including a “profit rate”.<\/p>\n At the end of the 30 years, Mr Al Hazmi would have paid about $1 million for the property.<\/p>\n Since Australian property and tax laws are designed around conventional mortgages, Islamic finance providers may offer different legal structures to avoid extra costs like double stamp duty<\/a>.<\/p>\n For example, Mr Al Hazmi’s name is on the title of his investment property, but he has a separate contract with his Islamic finance institution detailing the shared ownership arrangement.<\/p>\n Can it work out cheaper than a conventional loan?<\/p>\n Irwan Anto, an independent broker in Melbourne, said the cost of Islamic finance services in Australia is usually a bit more expensive than the conventional banks due to several factors.<\/p>\n Irwan Anto said only a small number of his clients chose Islamic financing for their mortgage. (Supplied)<\/p>\n “One of the reasons is because they have to pay the Islamic legal team [to arrange the documentation],” he said.<\/p>\n Mr Harris, from Salaam, said this included Islamic-compliant certification issued annually to ensure the product complied with Islamic law.<\/p>\n![\"A](\"https:\/\/www.newsbeep.com\/au\/wp-content\/uploads\/2026\/05\/180d98a18ed13a61ad7d65c963d3047a.jpeg\")
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