Islamic financing model makes it so much easier to buy a house

Like many Kenyans, Mr Elias Mwangi’s ultimate dream was to own a home and say goodbye to landlords and their pesky agents. But after looking   for an appropriate house with a comfortable payment period, his dream appeared unachievable.

“For one year, I had been shopping around for a house and after looking through most vendors’ websites, I found the payment terms out of reach. In fact, when you look at the real estate market, only a few middle class and the upper class individuals can afford it right now,” says Mr Mwangi. 

As an example, he cites the case of a leading real estate company whose off-plan purchase payment terms are a 20 per cent deposit, then a similar deposit within the two years it takes to complete the construction, by which time the buyer should have paid the full amount for the house.


“So if you are buying a house worth Sh10 to Sh15 million and you are supposed to raise all that cash within two years, it becomes a problem. Not everybody can afford that,” he says, adding that it he was on the verge of despair when he came across a billboard on one of Rama Homes’ sites and called them immediately.

“The 10 per cent deposit, coupled with a long-term payment plan of up to 12 years and the zero-interest rate on the instalments is what really caught my eye,” the Nairobi businessman says.

So in February this year, Mr Mwangi made a 10 per cent deposit (Sh1 million) for a Sh10 million three-bedroom apartment in South C, whose payment period is spread over 12 years. With the deposit taken care of, he will pay Sh179,000 for the first two years, which is the  time it will take to complete  the 10-floor residential block called Euromax Height in South C. Thereafter, he will pay Sh39,000 every month for the next 10 years.


“I pay Sh40,000 rent for my house in South C, so  paying Sh39,000 is like using the money to buy a house,” he says. “The way I look at it is that I will have paid about Sh5.3 million in two years, and considering that the rest of the instalment is like to paying rent but you end up owning the unit, tell me where else I can get a spacious three-bedroom house for that amount in Nairobi? Probably in the satellite towns s like Kitengela or Mlolongo.”

Off-plan buying, which involves buying a house before the developer starts building, has been catching on in the country. In a bid to spread the risk, a developer puts up houses for sale at discounted prices and offers favourable payment terms, in most cases by instalment.


The conventional practice is that you make a 30 or 20 per cent deposit of the total cost of the house and pay the balance in instalments over two years, usually the construction period.

But Rama Homes Ltd’s model, which the company says is inspired by Islamic principles, is different.

“We thought of introducing a unique product te to the Kenyan market. It’s unique in that instead of paying the usual 30 per cent deposit when buying a house, we ask for only 10 per cent of the price of the house. Besides, we offer you comfortable repayment periods of six, eight or 12 years, unlike the two years real estate companies are offering,” says Mr Adrash Hussein, Rama Homes’ sales manager.


Usually, the buyer in such an arrangement occupies the house after the two-year construction period, by which time they should have finished paying for the unit.

Mr Charles Ngwili, Rama Homes’ finance manager, says the buyers in their ongoing first project will also occupy their houses when they are completed. However, unlike in other off-plan arrangements, their clients will continue paying monthly instalments. 

 “After moving into their new home, they can use the  money they have been using to pay rent to cover the monthly instalments, making it even more convenient,” says Mr Ngwili.


According to the terms of engagement between Rama Homes and their clients, the buyer is supposed to have paid at least half the price of the house by the time it  is completed.

So if a house is going for Sh10 million, they should  have paid at least Sh5 million.

But the real kicker with this model, Mr Ngwili says, is that the monthly instalments, irrespective of how long they stretch, do not accrue any interest. They say this is in line with Islamic principles.

“It is wrong to charge interest in Islam. It is viewed as extortion and suppressive, particularly to the less fortunate,” offers Mr Hussein.

His sentiments are echoed by Mohammed Ali, their client and a pilot, who says that that having invested in another home that required him to offset the whole amount in two years, he found this model more convenient, adding that the  interest-free aspect enamored him of it.


“It is like taking a mortgage but without the interest,” he says.

But the fact that he is a Muslim meant he perhaps understood the model better than a non-Muslim.

Meanwhile, Mr Mwangi says he has learnt a lot after living with Somalis for a long time. “I have realised that when it comes to business, they are very straightforward people.”

Rama Homes’ General Manager Hassan Abdi says the project  is open to all Kenyans, irrespective of their religion.  He notes that, although about half of their clients are Muslims, which he attributes to their ability to understand the model better, non-Muslims are warming up to the opportunity.


“About half of those who have bought our two ongoing projects are Christians and Asians,” he says. “However, we have seen an increase in the number of Christians buying in our next two projects that are currently on sale. They are located in South C and Parklands, and will come with six-year and eight-year payment plans.”

Foreigners from the West have not been left behind and, according to Mr Hussein, “The interesting thing about them is that they are working  in big real estate companies but are coming to invest with us.”

“We are trying to introduce low-cost housing in high-end areas,” asserts Mr Hussein, adding that his company is looking forward to introducing this model on the outskirts of Nairobi to provide affordable housing for low-income earners. 


But for any firm to be able to successfully and effectively run such a housing model  it is obvious it must have a solid financial basis, a factor that would render the model almost impossible for many real estate companies operating in Kenya.

“We are a group of companies. We have stakes in the energy industry, spare parts and we are doing fairly well in the steel industry,” says Hussein.

To which Mr Ngwili adds, “The reason Hussein is mentioning all this is because people might be wondering where we get our funds from, or whether we will go down as fast as we have taken off.”

Seeing as this is a business like any other with profit margins to hit and goals to achieve, why are they offering such low terms?


Mr Hussein uses a phone on the table to illustrate his answer: “In Islam, if you bought this phone for, say Sh14,000, you cannot sell it for Sh50,000; that’s unacceptable. You are not allowed to make a profit of more than 100 per cent in Islam. So the key thing is the profit margin and we believe other developers are looking for the highest profit margins.”

Mr Mwangi concurs, saying some houses in South C are about 70 square metres but their prices are prohibitive. “I would expect the cost of putting up such a unit to be about Sh2.7 million. So when the developer puts the house up for sale at Sh6 million, he is making more than 100 per cent profit. Unfortunately, by so doing they are locking out many people because not everyone can afford that,” he says.

Mr Ngwili notes that running two projects at the same time gives them  an opportunity to take advantage of economies of scale in terms of seeking approvals, buying materials and covering running costs, which is more economical, compared with running one project at a time. 


In  the recent past, Kenyans have been swindled by real estate firms that promised to build them homes, only to disappear  after getting  their money. So how can  Kenyans tell that this is not going to be another scam?

“First, the fact that the lands’ title deeds are in our name is reassuring because if you own a piece of land that is valued at Sh200 million and you are collecting about Sh150 million from the public, it means the piece of land itself is enough to recover people’s money in case something bad happens tomorrow,” says Mr Hussein.

Mr Ngwili adds: “By virtue of having well-established affiliate companies, we are stable enough to finance our projects within the two years. Also, the fact that our first project under construction has reached the first floor barely a year after we began operations  tells a lot.”


Mr Hussein and Mr Ngwili further note that the fact that the client pay for the house in instalments means they can refuse to  pay if the developer does not meet their side of the bargain.

“According to our terms of engagement, if we haven’t completed construction, the client can stop making further payments until the construction is done, after which he or she can resume paying,” says Mr Ngwili.  

Meanwhile, the deposit and capital appreciation cushion the developer in case the client defaults. “If a client defaults or is unable to pay, we sell the unit at higher price because, since construction has been ongoing, the unit say, one year down the line, has appreciated. But the client gets back the money contributed up to the time of default,” says Mr Hussein.


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