Africa has been experiencing rapid urbanization and increase in slum dwellers which as a result leads to a housing crisis. There is thus a need to develop an alternative approach to housing to make the cities and urban areas inclusive. World Bank Group, through the ‘Stocktaking of the Housing Sector in Sub-Saharan Africa’ report, speculates that by 2050, 1.2 billion Africans could be living in urban areas. The same report indicates 4.5 new residents will occupy the informal settlements every year.
An analysis of the most of the countries in Africa indicates that those who can afford the cheapest form of formal housing constitute between 5 to 10% of the entire population. Almost 90% of the Africans live in informal settlements where living conditions are unsafe, substandard and lack the basic services. Most Africans cannot afford mortgage as it averages between 15 to 20% in most countries. Most mortgage providers also require a 10% down payment which most Africans cannot raise. Most people finance their housing needs through personal savings or other non-mortgage options. Islamic Finance is one of the viable solutions due to the following reasons.
You can own the property jointly with the financier
When you buy property on a mortgage or through conventional financial products, the ownership is transferred to you immediately. You are then given a time-frame where you pay premiums until you repay the debt. In simple terms, the financial institution loans you money only that they know that you want to buy a house.
On the other hand, Islamic Finance applies the principle of joint ownership to help you acquire property. The Islamic bank or financial institution will own a certain share of the property, and it will reduce as you repay the agreed premiums. The payments you make will be like rent for using the shares owned by the financier. Once you pay all the installments, the property changes hands and becomes yours.
There is no interest
Conventional banks charge interest rates which are subject to inflation rates and other economic situations. Most people have found themselves servicing loans for longer than they had anticipated due to inflation and changes in regulatory frameworks. Conventional financial institutions always adjust their policies to ensure that they do not incur losses in case of crisis.
Islamic finance does not charge interest but a profit on the asset bought. The financier buys the property and then sells to you at a profit. In most cases, the financial institution will pay the seller directly. You then sign a contract on how you shall repay the debt plus the profit added by the financial institution. Therefore, the buyer knows what he or she will pay within the given time-frame.
Shared risk and losses
What happens when you acquire a house on mortgage terms and natural calamities like accidental fire, earthquake or floods destroy it? You bear all the losses and still pay the mortgage. Many people thus avoid conventional housing loans due to this risk.
Islamic financiers share with you the risk and losses. When such a calamity occurs, you will share the losses based on the shares that own. The financial institution will also have terms that they shall apply in case you default on paying your installments.
The financier assesses the property before buying
Due to the shared risk, the Islamic financial institution must inspect the property to ensure that it is a safe investment and worth the prize. Such institutions know that defects on the property also puts them at risk of incurring losses. The institution will thus check whether the building standards are followed, the area is safe, and the local regulations are adhered to.
Unless urgent measures are taken, the looming housing crisis will continue to escalate in Africa. Penetration of Islamic Finance is still low but promising as conventional banks are as well opening Islamic Windows. Most people do not understand that such products exist and this calls for social education on the same to increase awareness.