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Originally Posted by NineDaysDead
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I'm by no means an expert or even particularly comfortable with Sharia banking, but it may be helpful to break out what Al Rayan Bank says is happening with its home financing.
First, there are three separate but interdependent contracts involved. Sharia says it's permissible to have interdependent contracts as long as they don't interact in complex ways to obscure the results.
The first contract is a contract of Diminishing Partnership. In this instance, the Bank puts up somewhere between 60% and 80% of the total property value and the home owner as the other partner buys the bank's share of the partnership down to 0% over a period of time. Interest is not charged, instead, the home owner agrees to value the bank's share as the amount the bank put up plus some additional lump sum. In general, the home owner makes equal payments over the life of the contract (in this instance four years) but he is allowed to buy out the Bank's share earlier if he so desires. If the bank has not had its share fully acquired at the end of the four years, the contract of Diminishing Partnership continues in force but another lump sum is assessed against the remaining value of the bank's share of the partnership. The contract of Diminishing Partnership will also cover which partner is responsible for paying administrative fees and stamp duty.
Under Sharia law making a profit is assumed to be the reason for going into partnership. If either party finds the partnership is operating at a loss for them, the contract is discharged. Exactly who needs to return money depends on the source of the loss. For example, if the home owner loses his job, the bank will return the full value of his share in the property. If, on the other hand, the home owner sells the property at a loss, since the loss comes from his sale, he has to make good on the full value of the Bank's share in the property. As for any increase in the value of the property between the time the Bank puts up its share and the home owner acquiring that share: the Bank says that any excess value beyond the lump sum added to the purchase price belongs solely to the home owner and is his profit in the partnership.
The second contract is a contract of Lease. The Bank owns its share of the property and the home owner leases the use of the Bank's share until the Bank's share diminishes to 0%. In general, the lease would provide for a regular payment of rent and the rent would diminish proportionately with the size of the Bank's share in the property.
Thirdly, there is a Contract of Service Agency. This is optional, in the sense that the Bank rather than the home owner could be the Service Agent. The home owner is usually the Service Agent as he has a greater long term interest in the property and it allows the Bank to offer a lower price if it doesn't have that financial responsibility. The Service Agent is responsible for maintenance of the property, paying utilities and property taxes and paying for insurance(s) deemed adequate by the partnership.
Something that might be a possible complication for the OP would be the existence of additional laws regarding debt. Judaic law as well as Sharia law forbids usury (in the sense of any interest, rather than exorbitant interest), but also requires the discharge of all debts by the jubilee year (seventh year) and, IIRC, the forgiving of any outstanding debt. So, you might have the complication of being taken to court to discharge a debt (or as much of it as you can) and (if you can't pay much of what is owed) the creditor taking a bath on it.