Muslim mortgages: Bucking the credit crunch

MyFinances : As standard mortgage lending is falling amid the credit crunch, one area is holding up: Muslim mortgages.

Muslim finance has seen massive growth in recent years with Sharia products as diverse as insurance, mortgages, investments and bonds coming on the market.

But it is the credit crunch that has now created a new lease of life for Muslim finance.


Growth for faith-based finance

Up until 2002, only the United Bank of Kuwait offered Islamic mortgages in the UK, but recent years have seen substantial growth in the sector with a number of high street lenders – including HSBC and Lloyds TSB - also now provide Sharia-compliant products to cash in on the area.

Mainstream banks have simply moved into the sector as they see the UK's two million Muslim as an area of growing demand.

Last year, a Financial Services Authority (FSA) study into Islamic finance found "huge potential for an expansion of Islamic offerings in the UK's financial markets" and Lloyds TSB reports demand remaining strong in the current financial turmoil.

Muslim mortgages have also been aided by changes to stamp duty. Previously someone buying a home with a Sharia-compliant mortgage had to pay stamp duty twice – at the beginning of the deal and when the mortgage was completed. Without this double tax, Muslim mortgages have become more affordable.


Value for money?

But do Sharia-compliant mortgages really offer value as well as standing up to moral demands?

Emile Abu-Shakra, at Lloyds TSB which has a range of Muslim mortgages, explains it was a myth that Sharia-compliant mortgages come at a cost.

"In the early days when they were first available, Muslim finance was more expensive, but that is not true now," he says.

"They are never going to be the cheapest on the market – where they are hundreds of standards mortgages and limited numbers of Muslim mortgages – but they are far from being the most expensive mortgages on the market."

Meanwhile, Stephen Amos at the Islamic Bank of Britain claims as demand has grown for Muslim mortgages and home purchase plans, so the deals have become more competitive and have entered the best buy charts.

Under such mortgages, a home loan company will buy a property on behalf of a client - contributing up to 90 per cent of the purchase price. The customer then pays the remaining percentage upfront (like a deposit) and repays the outstanding amount over an agreed term, together with a rental payment.

Rental payments are meanwhile linked to the LIBOR or another index– rising and falling with it – and reduce over time as more of the property is purchased.

Beating the credit crunch

Islamic finances offers a more conservative approach to finance, compared to the web of subprime mortgage-back assets that have led to global economic crisis, and in the current downturn this prudent outlook is predicted to see growth,

Accounts BDO Stoy Hayward point to the fact Islamic banks are one of the few financial institutions that still have significant sums of money available to finance individuals and businesses.

Islamic institutions have steered clear of the money markets that have caused the credit crunch by drying up – instead they only raise funds through depositors and shareholders. This gives them liquidity, when other banks are finding their funds drying up.

Dan Taylor, head of banking at BDO Stoy Hayward, explains: "Growth of Islamic banking in the UK will be attributed to their more conservative approach to financing, as the risks are shared with the investor, much like the private equity model.

"In addition, it is more difficult for Islamic financial institutions to use leverage; therefore their risk profile is naturally lower,” continues Mr Taylor.

Currently 20 major global banks operating in the UK have set up units to provide Islamic Financial Services. They have been joined by five stand-alone Islamic banks.

This compares with Switzerland which has five Islamic financial institutions and France and Luxembourg with four each.

"In light of the market turmoil, we could expect the number of stand alone Islamic financial institutions present in the UK to double over the next three years, further reaffirming London’s position as the pre-eminent centre of choice for the provision of Islamic Finance," Mr Taylor predicts.

Really ethical?

Muslim mortgages have come under fire from some quarters for just being a standard mortgage, but under a different name.

Mr Amos at the Islamic Bank of Britain, however, denies this, claiming more education is needed to what Islamic finance really offers.

"In the Middle East people trust Islamic products, but in Europe we have to educate people to Islamic principles.

"Once you sit down with a client and explain how the mortgage works they see it is completely different. It is the processes behind the deal that are different."

Mr Amos added a key difference was that Islamic institutions work in partnership with clients and investors.

"While big banks were looking at customers with greedy eyes, we like to establish partnerships and provide services entirely right for the customer."

This has also helped to Islamic banks to avoid the credit crunch – as while institutions around the world suffer the burden of subprime customers failing to pay their loans, default levels for Sharia-complaint mortgage are much lower.

The ethical side of Muslim finance – with no investments made in firms that deal in arms, alcohol or pornography – also attracts non-Muslim customers, Mr Amos says.

The ethical side of the business also runs to how banks make money. The Islamic Bank of Britain for example refuses to profit from bank charges. While late paying customers do face penalties, the charges are passed on to charity; something the bank itself does not publicise so as not to profit from it.

With the traditional mortgage market slowing and banks running out of cash, the prudence of Islamic banking - coupled with Muslim mortgages becoming more competitive - means out of the ashes of the credit crunch turning to faith to buy a property could be a savvy move.

Sharia-compliant mortgages are here - and they're not just for Muslims

By Huma Qureshi

A mortgage lender who allows you to take all the increase in the price of your home when you sell, but is prepared to share any loss if the property has fallen in value. Such a deal may seem too good to be true in the current property market, but it is exactly what a handful of banks specialising in Islamic home loans are offering.

Islamic mortgages have been in the mainstream market in the UK for some years but it can often be difficult to get to grips with sharia-compliant financial products, which can seem confusing. In Islam, making money from money by charging interest is deemed unfair and is not permitted. So where do you start when choosing an Islamic mortgage?

There are three models of Home Purchase Plans (HPPs): Ijara, which means 'lease' in Arabic; Musharaka, which means 'partnership'; and Murabaha, meaning 'profit'. Depending on the model, the lender will levy rent or add profit to the amount you pay back instead of charging interest.

An Ijara is a lease-to-own HPP: the bank purchases the property you want then leases it out to you. At the end of the term the bank transfers ownership of the property to you.

Under a Musharaka plan (also known as 'diminishing Musharaka'), you buy the property jointly with your provider and gradually buy the bank out of it. So if you put down 10 per cent of the purchase price, the bank will buy the remaining 90 per cent. You pay the bank monthly rent on the share you don't own as well as buying more shares in the property with each monthly payment, with a view to owning the property outright at the end of the term - hence the 'diminishing' nature of the partnership. The more shares you own, the less rent you pay to the bank, and the cost of a share in the property is based on the property's original cost price, not its market value.

In a Murabaha plan, the bank will buy the property you want then immediately sell it on to you for a profit. You then pay fixed monthly repayments on the higher price, but with no interest to pay back to the bank. So the bank might buy a property that costs £200,000 and sell it on to a customer for £250,000; the customer then pays that sum back over a fixed term.

It might be argued that charging rent or making a profit is no different to charging interest, in that ultimately the providers still make money - but as Islamic finance experts explain, it is how that money is made that is the underlying difference between Islamic mortgages and conventional ones. Farrukh Raza from Islamic Finance Advisory and Assurance Services, an independent consultancy, says: 'The issue isn't with making money, it's the conditions in which that money is made.

So instead of making money through interest, Islamic banks will make money through profit or through rent when the bank owns the property as an asset. It is important to remember that Islamic mortgages simply offer an alternative financing structure which gives Muslim customers different options - it's not a 0 per cent deal to buy your house for nothing.'

HSBC has been offering sharia-compliant home finance for five years through its Islamic finance arm, HSBC Amanah, while the Arab Banking Corporation has its own Islamic HPP range, called Alburaq, which is also available through Lloyds TSB (underwritten by Bristol & West). Ahli United Bank and United National Bank also offer HPPs in the UK, and the Islamic Bank of Britain (IBB), the country's first Islamic bank, is launching its own range of HPPs this week.

The selling of HPPs came under the Financial Services Authority's regulation last year, so customers will get the same protection as they would had they taken out a conventional mortgage.

Since there are no interest rates to compare between different Islamic mortgages, what should you look for when choosing an Islamic finance provider and home purchase plan? Nader Kamel, sales quality manager for HSBC Amanah, says: 'You should consider how much flexibility you need, and how much it will cost you to take out the financing. Are there any fees? Can you make lump sum payments? Can you rent out the property? How much rent is the bank charging you?'

HSBC Amanah started off offering Ijara plans but now offers diminishing Musharaka instead. Kamel says: 'We found customers were a little uncertain about the bank owning the property in full and only transferring it into your name at the end of term [as happens in Ijara plans], but with diminishing Musharaka, you are co-owners with the bank from the start. The knowledge that every month you are increasing your share of the property and sharing all risks with the bank, is more reassuring to customers.'

Some Islamic finance experts concede that such home deals may work out to be more expensive than conventional mortgages, but sometimes there is not much difference between them.

If you bought a property for £250,000 using a diminishing Musharaka plan from HSBC Amanah, you would pay around £1,553 a month (made up of £1,246 in rent and £307 in contribution payments to increase your share), based on the bank buying 90 per cent and you putting down a 10 per cent deposit. If you took out a conventional two-year fixed-rate loan with HSBC (at 6.29 per cent and with a £799 fee) on £250,000, you'd pay around £1,655 a month over 25 years. If you do opt for a HPP that includes rent payments, you should ask providers how much the rent and any administration fees will be.

All Islamic finance providers in the UK use the Libor index as the benchmark for rental payments, and rental rates are reviewed every six months. Both HSBC Amanah and the IBB charge rent as 6.95 per cent of the finance taken out with them (that is, 6.95 per cent of the share that you don't own, not 6.95 per cent in interest). Alburaq has three HPPs and charges a 6.76 per cent rental charge on its standard residential products, 6.56 per cent on its discounted plan (until March 2009) and 6.49 per cent on its fixed plan (also fixed until March 2009).

The rental charge percentage is the same, regardless of the size, location or value of the property. Administrative charges are lower than those on a conventional loan, however; HSBC Amanah charges a £275 application fee, while IBB and Alburaq charge £299. Providers assess whether you can afford the loan in the same way as they would for a conventional mortgage, and, if approved, you can be given the equivalent of a mortgage in principle.

Islamic finance products are not just for Muslims - around 2 per cent of the IBB's customer base are non-Muslim and don't choose the bank for religious reasons, but for ethical ones. Islamic banks will not invest in firms involved with gambling, alcohol, tobacco or pornography.

Sultan Choudhury, commercial director at the IBB, says: 'Our products are open to everyone and customers who aren't Muslim choose the bank because of its ethics. Because of the nature of our investments, we are an ethical provider, and, increasingly, that is what people want.'

Islamic lenders can provide alternatives

WASHINGTON -- The mortgage industry may be in meltdown, but at least one class of lender appears to be flourishing: Islamic finance companies that offer Muslim home buyers alternative arrangements such as lease-to-own deals so they can avoid making the sort of interest payments that many believe their religion forbids

Officials at Guidance Residential, a company in Reston, Va., that has financed more than 5,000 home purchases since it began in 2002, said the company is having its best year yet, with business up 7 percent in the first quarter of 2008 from the first quarter of 2007.

At University Islamic Financial, which began in Ann Arbor, Mich., and has expanded its operations to Virginia, California, Ohio, Illinois, Indiana, Maryland, New Jersey, Texas and New York, officials said the number of home-financing applications quadrupled from last March to this March.

Representatives of the four major Islamic home-finance institutions in the United States said they do not track the reasons customers choose them over conventional mortgage brokers.

Several speculated that it was due to the natural growth of what is still a fledgling retail industry, as well as two side effects of the mortgage crisis: The drop in prices in many regions has brought homes back within reach of first-time buyers, who make up a sizable chunk of Islamic financiers' customers. And the drumbeat of negative publicity about the practices of subprime mortgage lenders has amplified the distrust and discomfort the conventional mortgage industry already inspired in many Muslims.

"Folks have to be questioning the methods used by conventional mortgage companies over the last three or four years based on what's happening today," said Hussam Qutub, a spokesman for Guidance. "And I think that makes more people think, 'Well, what about the emergence of this (Islamic-) compliant financing industry? Let me give it a look and educate myself about it to see if it could perhaps be more beneficial to me.' "

That was the prevailing sentiment among potential customers who approached an advertising booth staffed by Guidance representatives at the annual spring fair held by the All Dulles Area Muslim Society in Sterling, Va., on a recent weekend.

Mounir Elhaj, 45, a native of Sudan who works at a moving company, wanted to know how Guidance deals with customers who fall behind on their payments. He said he recently helped move a woman whose house was foreclosed after she missed payments.

"She had been paying her mortgage for 17 years, and the bank still took her house," Elhaj said to the Guidance sales representative. "So I want to know if I bought a house and then fail to pay, can you help me?"

The representative, Amr Mohamed, smiled and replied, "Yes, we can," adding that Islamic law, known as sharia, forbids businesses from profiting from a customer's financial hardship. So if a customer is late on payments, Guidance charges him or her a flat administrative fee to cover processing costs but none of the percentage-based penalties and additional fees that conventional mortgage companies can pile on.

Islamic home financing aims to offer Muslim buyers the same opportunities as conventional lenders but with a twist that gets around sharia's prohibition against the payment of riba. Generally defined as excessive gain, riba has over the years come to be considered the equivalent of making money by renting money -- charging interest -- because the borrower shoulders risk while the lender is guaranteed a return.

In one of the alternative arrangements offered by Islamic finance companies, the company buys the house, then sells it to the buyer in fixed monthly installments at an agreed-upon marked-up price. The markup rate is kept competitive with the prevailing interest rate on a conventional mortgage. So apart from a few additional transaction costs from the atypical nature of the arrangement, the buyer's monthly payment is about what it would be with a conventional mortgage.

Rizwan Jaka, 35, president of the All Dulles Area Muslim Society, also said such arrangements are a milestone in the integration of Muslims in the American mainstream.

"It definitely marks a coming of age for us. ... It's part of the whole process of being a part of this country while being able to have our faith accommodated," he said. "The American dream is to purchase a house, and the American Muslim dream is to be able to do so in an Islamic manner."

In a slow housing market, Islamic mortgages are booming

By N.C. Aizenman

WASHINGTON — The mortgage industry might be in meltdown, but at least one class of lender appears to be flourishing: Islamic finance companies that offer alternative arrangements such as lease-to-own deals so Muslim home buyers can avoid making the interest payments that many believe their religion forbids.

Officials at Guidance Residential, a Reston, Va., company that has financed more than 5,000 home purchases since it began in 2002, said the company is having its best year yet, with business up 7 percent in the first quarter of 2008 from the first quarter of 2007.

At University Islamic Financial, which began in Ann Arbor, Mich., and has expanded its operations to Virginia, California, Ohio, Illinois, Indiana, Maryland, New Jersey, Texas and New York, officials said home loan applications quadrupled from last March to this March.

Representatives of the four major Islamic home-finance institutions in the United States said they do not track the reasons customers choose them over conventional mortgage brokers.

Several speculated that it was due to the natural growth of what is still a fledgling retail industry, as well as two side effects of the mortgage crisis: The drop in prices in many regions has brought homes back within reach of first-time buyers, who make up a sizable chunk of Islamic financiers' customers.

And the drumbeat of negative publicity about the practices of subprime mortgage lenders has amplified the distrust the conventional mortgage industry had already inspired in many Muslims.

"Folks have to be questioning the methods used by conventional mortgage companies over the last three or four years based on what's happening today," said Hussam Qutub, a spokesman for Guidance.

"And I think that makes more people think, 'Well what about the emergence of this (Islamic-) compliant financing industry? Let me give it a look and educate myself about it to see if it could perhaps be more beneficial to me.' "

Beliefs forbid conventional loans

That was the prevailing sentiment among potential customers who approached a booth staffed by Guidance representatives at the annual spring fair held by the All Dulles Area Muslim Society in Sterling, Va., recently.

Nabila Zerrarka, an Algerian-born woman pushing a stroller, wanted to find out if Guidance's home-finance options were more straightforward than those offered by traditional mortgage brokers.

"Deep down, I don't feel comfortable paying interest because it is against my beliefs," said Zerrarka, 29, who is searching for her first home and has a prequalification letter for a conventional loan from Bank of America. "But I also feel it's against my financial interests to pay interest. ... What we've seen is that with interest-bearing loans, there are all these gimmicks and hidden costs and tricks that they can surprise you with."

Mounir Elhaj, 45, a native of Sudan who works at a moving company, wanted to know how Guidance deals with customers who fall behind on their payments. He said he recently helped move a woman whose house was foreclosed on after she missed payments.

"She had been paying her mortgage for 17 years, and the bank still took her house," Elhaj said to the Guidance sales representative. "So I want to know if I bought a house and then fail to pay, can you help me?"

The representative, Amr Mohamed, smiled and replied, "Yes, we can," adding that Islamic law, known as sharia, forbids businesses from profiting from a customer's financial hardship. So if a customer is late on payments, Guidance charges him or her a flat administrative fee to cover processing costs but none of the percentage-based penalties and additional fees that conventional mortgage companies can pile on.

Lenders find ways around interest

Islamic home financing aims to offer Muslim buyers the same opportunities as conventional lenders but with a twist that gets around sharia's prohibition against the payment of riba. Generally defined as excessive gain, riba has over the years come to be considered the equivalent of making money by renting money — in other words, charging interest — because the borrower shoulders risk while the lender is guaranteed a return.

In one of the alternative arrangements offered by Islamic finance companies, the company buys the house, then sells it to the home buyer in fixed monthly installments at an agreed-upon marked-up price. The markup rate is kept competitive with the prevailing interest rate on a conventional mortgage. So apart from a few additional transaction costs from the atypical nature of the arrangement, the buyer's monthly payment is roughly equivalent to what it would be with a conventional mortgage.

A second option is for the financier and the home buyer to enter a lease-to-own contract similar to those used to buy cars. Once again, the rental portion of the monthly payment is kept equivalent to prevailing interest payments.

The third model, which is favored by Guidance, is also based on a lease-to-own arrangement, except that the buyer and the finance company form a limited-liability entity to own shares of the property.

All three arrangements got a boost in 2001 when the government-sponsored Federal Home Loan Mortgage Corp., or Freddie Mac, agreed to begin buying them on the secondary market. Last year, Freddie Mac bought more than $250 million in Islamic home loans — a tiny fraction of the corporation's $1.8 trillion business but nonetheless a slight increase over previous years, according to spokesman Brad German.

While Islamic finance companies have convened boards of prominent scholars to certify that their finance arrangements comply with sharia, not all Muslim thinkers are convinced that they are necessary.

Mahmoud Amin el-Gamal, an economics professor at Rice University specializing in Islamic finance, noted that even in Muslim countries, sharia-based financing was developed in only the past several decades.

And he argued that because conventional mortgages are secured by a physical good, namely the home, that is usually the only asset the lender can repossess if the borrower fails to repay, such loans should not be considered the equivalent of making money by renting money.

Aldar eyes property market

DUBAI: Aldar Properties Company sees uncertain global market conditions generating promising real estate openings for the Abu Dhabi property company, chief financial officer Shafqat Malik said yesterday.

"The market conditions are such that there are some attractive opportunities," Malik told the Reuters Islamic Finance Summit in Dubai.

With the exception of the US, where Aldar does not have the knowledge it thinks it needs to enter the market, the company is seeking talent as well as assets in any acquisition it makes and will not be rushing into any purchases.

Aldar, which is owned by leading Abu Dhabi institutions as well as more than 20,000 other investors there, has developed residential beach resorts and commercial estates in Abu Dhabi.

He said Aldar was actively working on two projects in Malaysia and Kazakhstan.

UM Financial Supports CMHC Study on Islamic Mortgages

Toronto - UM Financial has supported Canadian Mortgage and Housing Corporation (CMHC) $65,000 study on Islamic Mortgages and other faith mortgages. Islamically acceptable financing/mortgage is a product/commodity does not come at the expense of others products nor does it compel any Canadian to purchase.

UM is a premier Canadian Islamic finance corporation. The company secured a $120 million facility from Credit Union Central of Ontario in 2004, which is used to finance Shariah compliant real estate residential properties in Canada.

In a letter to Karen Kinsley, CEO of the Canada Mortgage and Housing Corporation, the CEO of UM Financial Omar Kalair said, "Islamic mortgages are equity partnership with payments coming in the form of profits(rental). Islamic finance is structured trade products devoid of usury, similar to ethical products which have filters."

A similar mortgage model is used by a Manitoba Credit Union serving the Mennonite community which abstains from usury. As people of different faith have options for buying meat when going to a grocery store between Islamic meat (halal), Jewish meat (kosher), organic fed (ethical), etc we as a company offer people who wish to have financing devoid of usury products available to them."

To the criticism the industry's proponents respond that the difference is there because Islamic law sees one, even if functionally it's hard to find it.

"It's like the difference between a wife and a live-in girlfriend," says David Loundy, vice president of the Chicago-based Devon Bank, a Jewish-owned bank providing Islamic financial products through its branches.

"They may serve some of the same functions, but there's a legal difference between the two, in terms of inheritance and taxes."

Kalair states "We have over 150 Muslim organizations in Canada who have worked with us in marketing Islamic finance. We have over 100 financial institutions that we have met to discuss Islamic finance products. We have been able to structure Shariah compliant financial products with Credit Union Central of Ontario, Metro Credit Union and McMaster Savings and Credit Union.

All our products are within Canadian laws and required no changes in the law as we have communicated our products with Ministry of Finance, OSFI, OSC, FSCO and CMHC. Currently we have serviced close to 500 households however we have a current waiting list of 5,000 households."

"Other governments have encouraged the development of Islamic Finance with the US Treasury Department appointment of a Scholar in residence for Islamic Finance, establishment of Islamic Finance Project at Harvard University, Dow Jones Islamic Market Indexes and Britain PM Gordon Brown speech at a London Islamic Finance conference wanting to "make Britain the global center for Islamic finance".

Today we have two US banks offering Islamic Financial products in Detroit and Chicago and LloydsTSB offering Islamic Financial products across 2000 branches in Britain."

"We don't see Islamic financing ghettoizing the Muslim community. There would be no reason to assume when today we have banks in Detroit and Chicago offer Islamic mortgages at par to the Muslims community through its branches."


We urge the CMHC to proceed further with their study on Islamic mortgages which will be openly shared for all Canadians to analyze. Islamic mortgages have been operating in Canada for over 25 years.

A copy of the letter was sent to Jim Flaherty, Minister of Finance and Monte Solberg, Minister of Human Resources and Social Development who is responsible for the CMHC.

that has structured Shariah compliant banking deposit products with McMaster Savings and Credit Union. UM is the Canadian representative on two of the largest Islamic Finance associations: Islamic Financial Services Board (IFSB) based in Malaysia and Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI) based in Bahrain.