MOGAMAT ALI SALIE explores the Islamic alternative to interest-based financing solutions for solar energy.
SOUTH AFRICAN Muslim homeowners are turning to shariah-compliant bonds to fund the installation of solar power systems, allowing them to become more energy independent and reduce their carbon footprint while saving money on electricity bills. With load shedding having been a persistent issue in the country for the past 15 years, this innovative solution is becoming increasingly popular among homeowners seeking to access the equity in their primary residence. In this article, we will explore how this can be achieved and the benefits of doing so.
Shariah-compliant bonds are financial products that conform to Islamic principles, avoiding charging or paying interest. Instead, the borrower and lender agree on a partnership arrangement, whereby the lender purchases the shares of the borrower gradually, based on the Diminishing Musharaka principle.
The Diminishing Musharaka principle is typically used when a party that wants to own an asset, and cannot afford to pay the full price, seeks out financing from another party, a Shariah compliant bank. This results in the first party acquiring full ownership of the asset by first purchasing the share of the Shariah compliant bank over time, while also abiding by Shariah regulations.
Diminishing Musharakah, unlike an interest-based mortgage, can be considered as a sort of shared ownership with a lease, sale-back arrangement when it comes to home financing. This shared ownership arrangement enables Muslim homeowners to access the equity in their property without the need for interest-based mortgages, thus allowing them to adhere to their religious principles.
The homeowner typically obtains the recommended three quotes from solar power installers and checks their online reviews. Then an application is made for a shariah-compliant bond from a financial institution that specialises in Islamic finance. The funds are then used to install a solar power system. The cost of a solar power system in South Africa can vary depending on its size and the equipment used. On average, a 5-kW system, for a single-phase electricity supply, can cost between R100 000 to R150 000 which can be financed over a period of 10-15 years.
The 5-kW solar power system typically consists of an inverter which would be 5-kW, six solar panels depending on the size, a battery bank able to store 5-kW of power, and a monitoring system which is usually a cell phone application to monitor the inverter’s statistics. The solar panels capture the sun’s energy and convert it into direct current (DC) electricity, which is then converted into alternating current (AC) electricity by the inverter. Excess energy generated during the day can be stored in the battery bank for use at night or during periods of low sunlight, and a monitoring system can track the system’s performance to ensure that it is operating at optimal levels.
The benefits of installing a solar power system are numerous. By generating their electricity, homeowners can reduce their dependence on the national grid, which is often unreliable and subject to power outages. It can also save homeowners money on their electricity bills in the long run, as the cost of electricity in South Africa continues to rise. Additionally, it is an environmentally friendly option that can help to reduce the household’s carbon footprint.
Let us consider an example. Assume that the homeowner has a primary residence worth R2 million and has paid off R1 million of the mortgage. They accept a quote, approach a shariah-compliant financial institution to access the equity and obtain a shariah-compliant bond for R150,000, which they use to install a 5-kW solar power system costing R150 000. They then repay the loan over a period of 10 years and receive a return on their investment by saving on electricity.
Assuming that the homeowner saves R3 000 per month on their electricity bills, the solar power system will pay for itself in just over four years. Over a period of ten years, the homeowner will save R360 000 on their electricity bills, a substantial amount that will more than cover the cost of the solar power system. Additionally, they will have contributed to reducing their carbon footprint and becoming more energy independent.
In conclusion, accessing the equity in a primary residence for a shariah-compliant bond is a smart and profitable way for Muslim homeowners in South Africa to install a solar power system and become more energy independent. With the rising cost of electricity and growing concerns about the environment, this is an option that should be considered by all homeowners looking to reduce their energy costs while adhering to their religious principles.
- Mogamat Ali Salie is a co-founder of Muslim Fin.
MuslimFin is a fintech business that is specifically focused on educating and directing Muslims and non-Muslims on Shariah-compliant banking, investments, insurance, estate planning, zakat, and Sadaqah products and services from the South African consumer context.