Yes, ICFAL will share a loss when an unavoidable loss situation occurs which is out of the control of both of the parties. This is the unique aspect of our Mushaarakah financing system.
However, it must be noted that over time, although there is volatility in house prices, it is rare to see a decline in property prices. ICFAL takes a long-term view when it comes to assessing the pricing of its Musharakah units. ICFAL will review the pricing on its Musharakah shares should a significant shift in the market occurs.
If, on the other hand, a sale at loss is driven by the member, then the initiative is carefully investigated by ICFAL and a genuine need to sell is established to avoid any unfair passing of member’s interest to a loss to all the general cooperative members.
At the time of purchase – We obtain an independent valuation of the property and rental price. Along with this, we conduct our research based on historical property prices and rental growth data of the relevant suburb.
These growth rates will then be presented to the member for their agreement. If the member disagrees, they may obtain their own valuation at their own cost to renegotiate an appropriate growth rate.
ICFAL will share the profit or loss of selling the property net of any costs involved to sell the property.
Yes. During the term of our Musharakah agreement, ICFAL shares in the costs for strata rates (if applicable), council rates, fixed water charges and building insurance.
The member is expected to pay the invoices and submit them to ICFAL for us to process their request.
In an ideal situation, we will like to re-assess the property house price and rental prices every year. However, due to resource constraints, this is not practical for us at this stage.
These periodic reviews are opportunities for both ICFAL and the member to re-assess the market situation and make the relevant adjustments to property and rental prices.
1. We are not tied to prevailing interest rates.
ICFAL’s Musharaka model wasn’t always more expensive. We are currently witnessing historic lows in the prevailing market interest rates. In fact, prior to the historically low-interest rate environment, we are experiencing now, ICFAL was competitive and even cheaper than the prevailing interest rates.
Due to the fact that ICFAL’s profit rates are not directly related to the prevailing interest rates, our profit rates will always be different to the market.
Our funding is purely from our members and therefore we are not under any obligations to third parties to fix ourselves to the prevailing interest rates.
2. ICFAL is still a relatively small provider of finance compared to many conventional banks. Therefore, we naturally have a higher cost base to run our operations in order to benefit the community. The larger organisations have a much greater volume of transactions and therefore can pass on cost savings to the members.
The payments made to ICFAL are based on the concept of trading and reflects the real-world return on property investment.
The monthly payments made to ICFAL consists of 3 components:
1. Rent – The rental fees paid to ICFAL are taken from a market valuation at the beginning of the contract. A pre-determined rental increase is negotiated and applied at the beginning of the contract.
2. Share purchase – This is the original contribution ICFAL made to purchase the property. ICFAL then offers these shares for sale to the member on a monthly basis.
3. Profit on share purchase – This is the profit ICFAL makes from selling its shares back to the member on a monthly basis.
Over time, the rent and profit on share purchases paid to ICFAL can change depending on market forces on the real estate market. These rates are reviewed every 3, 5 or 10 years depending on a member’s request.
Our finance contracts are based on Musharakah Mutanakisah or Diminishing Partnership.
Musharaka is a partnership contract within the bounds of Shariah. It features two parties who contribute capital (for a business) and share the profits based on a pre-agreed ratio. The ratio extends to sharing of losses between the parties.
At ICFAL, we implement a mode of Musharakah known as the Diminishing Musharakah. Here the principles of contribution and sharing of profit remain. The key difference comes in the time factor where there is a set time frame to which the partnership continues. You will be renting out our remaining portion of the house during the contracted period. Over the course of the financing period, the majority share held by ICFAL will be sold gradually to you. Hence the name “Diminishing Musharakah” as the share of our partnership slowly diminishes into your sole ownership.
The process of our Musharakah Home finance is as follows:
1. The member selects the house to purchase (assuming the member has 20% of the estimated purchase price with ICFAL already).
2. We obtain a valuation of the property price and rent.
3. ICFAL and the member will negotiate on a rental price, rental price increase and property price increase over a period of 3, 5 or 10 years.
This is a regulatory requirement to ensure ICFAL is clear and transparent to the member about the potential amount of payments they will be making over the entire term of the contract.
Please note, ICFAL does take into account significant and fair movements in market prices if required.
4. We purchase the house in partnership with the member.
5. The contribution made by both ICFAL and the member will then be considered the respective shares in the property by each party. These will be then used to determine profit or loss sharing, rental contribution, and fixed cost contribution of the property.
For example, if ICFAL contributed $400,000 and the member contributed $100,000 on a $500,000 property, ICFAL will then hold 400,000 shares on a total of 500,000 shares on the property.
6. Over time, the member pays rent on ICFALs share of the property. This rent amount will reduce with each additional share purchase the member makes.
7. The member purchases ICFAL’s share over time.
Our funds are strictly sourced only from our members and not any other external providers or parties.