alternative finance arrangements

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A term applied in the Finance Acts to certain lending arrangements that comply with Islamic law. Muslims may refuse to enter into an arrangement that requires the payment of interest, this being contrary to the Koranic prohibition on riba. In order to provide financing for housing and business purchases, several alternative financing structures have been developed, notably murabaha (sale with deferred enhanced payment), mudaraba (advancing capital in exchange for a share of profits), wakala (an agent investing money on behalf of a principal), and diminishing musharaka (a joint ownership arrangement used to finance the purchase of property or some other asset). The Finance Act 2005 (s 46–47) and Finance Act 2006 (s 95) introduce a tax code under which UK tax is levied on the lender and relief is granted to the borrower as if (broadly) a proportion of each payment were interest. See also istisna'a.

Subjects: Social Sciences — Law.

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