Islamic Mortgages Blend Faith and Capitalism
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UPDATED: Nov 2, 2012
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A new type of mortgage is gaining popularity in the United Kingdom and the United States. It is a way to combine capitalism with the ethics of religion: Islamic mortgages.
According to Bloomberg news, the global Islamic finance industry is worth a staggering $1.3 trillion, and is continuing to grow, with annual growth rates of 15 percent. A part of that industry is based upon real estate and mortgages. Islamic mortgages have funded a wide variety of purchases, including residential mortgages as offered by the UK’s first lease-based mortgage provider: United National Bank of Pakistan. But these financing tools have also funded larger purchases, like the construction of the Shard of Glass in London.
Rules and Regulations
Islamic mortgages are fundamentally different than traditional mortgages due to religious restrictions of Islam. Under the principles of Shariah (Islamic Law), a payment or interest is prohibited. Conventional mortgages cannot be used by practicing Muslims, but many home prices are too high for a typical customer to buy outright. This is where Islamic home loans assist buyers. For these loans, the bank can purchase a property and sell it back to a mortgage owner in three different ways:
- A bank can sell the property at a higher price to the mortgagee in an installment plan, or rent it to the homeowners and have the mortgagee pay a contribution towards the equity of the home each month until it is paid off.
- Owners can choose a “lease to purchase” option because the homeowner rents the property while paying down principal and gaining equity on the property.
- Mortgagees can create a Limited Liability Company (LLC) where the finance company and the homeowner both own shares of the property.
Due to religious laws, there are restrictions for Islamic-funded real-estate. Islamic financiers focus on businesses that are involved in ethical businesses, according to Richard Thomas, CEO of Gatehouse Bank, a Shariah-compliant bank in the UK. The financing does not go toward businesses such as pubs, casinos, or businesses with questionable moral codes. Currently there are globally-located, Islamic-financed projects with Rolls-Royce, British Telecom, and Procter & Gamble.
Since the 1970’s, many Middle Easterners buyers brought oil-funded money to the UK and invested in real estate. In the last 10 years, buyers in the UK have purchased businesses and home properties using Islamic financing. This influx of new business is stimulating the local economy because foreign buyers—Middle Eastern buyers in particular—tend to spend more than domestic buyers on real estate.
Yolande Barnes, head of residential research at Savills (one of London’s exclusive real estate agencies) said Middle East investors spend four times more than average UK property buyers. The properties range from lavish homes and apartments to smaller investment properties, which are fueled by London’s unique business code.
“London even at a global city level is quite unique. It’s very accepting of overseas buyers and quite unusual in that. It’s surprising how many cities for example, Singapore and Sydney, actually charge more tax or exclude foreign purchases. It’s a very transparent market in London. It’s easy for foreigners to buy here. It is seen as a safe haven of stored wealth,” Barnes said to Bloomberg.
While Islamic mortgages are more common in the Middle East, Malaysia and United Kingdom, they have been increasing in the United States. Several years ago, Freddie Mac agreed to buy these types of home loans. While they might be gaining popularity, it doesn’t mean that non-Muslim clients need to jump at a new opportunity. Due to the limited number of Islamic-run banks, there is typically a higher cost to having an Islamic mortgage. There are other forms of regular and government mortgages available to any prospective homeowners in the field.
There are currently 1.5 billion Muslims in the world. Somewhere along the line, religion and business must find a way to connect. Shariah principles promote development and an ideology of sharing of risk in physical assets; all of which can contribute to an economic growth in society.
Sultan Choudhury, the CEO of the Islamic Bank of Britain, believes there can be a positive factor to this new wave of financing. “We’re actually a good news story for Islam in fighting the negative perceptions because when we explain how our products work to people of other faiths, they’re really interested and they say well, ‘this seems to be good for everybody,’” he said.