Sharia compliant mortgages

[man of action!]

My understanding with Sharia compliant mortgages is no interest can be charged and many are set up similar to a lease option - eg lease it for 25 yrs and you have an option to buy it for $0.

This means the potential home buyer rents the property ( I would assume at quite a "premium" to normal market rates ) for a set term of, say, 300 months and at end of that term, ownership transfers to the "renter".


That's all fine in a perfect world where everything goes as planned, but given no interest can be charged, how would the situation where the "renter" misses a payment etc, be handled?

 

[Freeatlast]

Hi John, and welcome to SS forums.....

I'm sure someone will come along and beat me up for saying this, but what you have mention kind of sounds like a wrap !!!!

Either way I would have assumed that a missed payment would be treated in the same way as a normal bank mortgage....

Cheers

 

[quintets]

interesting links

I found some interesting links to Islamic Banking and how banks need to be certified to be "Riba-free" (Interest-free).

Islamic Banking Standards Board (The Asian Banker)

Need for an Islamic Banking Standards Board (The Asian Banker)

Apparently, Islamic banks are still developing standards which allow them to comply with international guidelines and also be compliant with the Qu'ran.

I also read that the Islamic banking market is in excess of $200bn dollars and growing at 10-15%/annum

Although Derivex may have come about because of a need to chase this market, it doesn't mean their business model is sustainable.

Jireh

 

[likewow]

Interesting subject. The first i heard of Sharia system was after Sep 11 and the Americans were saying the Islamic terrorist groups were using it to transfer money around the world. They were referring to it as like a worldwide parallel financial system, operating outside the mainstream interest based financial system. Fascinating stuff.

 

[quintets]

I wonder whether the Americans were using language like "outside the mainstream banking system" to foster a sense of panic.

Money is a neutral entity and one of the foundations of "our" (big grain of salt) system is that we can charge interest. It's sort of an axiom or a priori given. Take that away, and your whole banking system changes. So it's outside the square, but nonetheless workable.

I don't like it because it actually decreases transparency, in a way. With interest, I have a firm idea on what is value and what is extra interest. In Shariah, they seem to "bend" the qu'ran by pretending such distinctions aren't there. Oh well. That's their limitation and they have to live with it.

Jireh

 

[quiggles]

Yes, no, maybe. The Shariah rules are designed to forbid usury (criminally high interest) and take the most direct route.

NB - why are Jews known as moneylenders? Because they were forbidden by Christians to practise many trades and Christian were forbidden to lend money for interest. Seems the Muslims might have stuck to ther guns, is all.

Back to the main bit - essentially (and this is not meant to offend) I understand the economics of a Shariah compliant loan from a lenders viewpoint are similar to those of a full term fixed interest loan. Quite a few banks were looking at addressing this market a couple of years back. I think it's a relatively transparent (in the good sense) arrangement.

 

[quintets]

Quiggles,

I don't think Christians were forbidden from lending money. How do I know? Well, my dad was a preacher and I never heard a sermon about it. (Although, I may have fell asleep one more than one occasion. )There are verses which say that for people in dire need, you shouldn't. But I think that's the charitable side of the Bible coming out.

That said, I wonder whether the injunction in the Qu'ran is the only one, or are there other passages that need to be understood in context.

Hmmmm...

Jireh

 

[quintets]

Whooops...I mean to say for people in dire need, the recommendation is to not charge interest.

 

[geoffw]

Quiggles,

I don't think Christians were forbidden from lending money. How do I know? Well, my dad was a preacher and I never heard a sermon about it.

I'm with Quiggles on this one. We're talking about Medieval Christianity, which is not necessarily to do what was in the Bible .

 

[quintets]

I'm with Quiggles on this one. We're talking about Medieval Christianity, which is not necessarily to do what was in the Bible .

Medieval. i musthave fallen asleep for that one.

 

[Aceyducey]

I'm with Quiggles on this one. We're talking about Medieval Christianity, which is not necessarily to do what was in the Bible .

Ditto - think usury.

The Evil of Usury. "The rich ruleth over the poor, and the borrower is servant to the lender" -- Proverbs 22:7

Some background is here, including the medieval timeframe: http://www.newadvent.org/cathen/15235c.htm

BTW I didn't think modern christianity was necessarily to do with what was in the Bible either

Cheers,

Aceyducey

 

[quintets]

I was thinking of Leviticus 25:35-36:

If one of your brethren becomes poor, and falls into poverty among you, then you shall help him, like a stranger or a sojourner, that he may live with you. Take no usury or interest from him; but fear your God, that your brother may live with you. You shall not lend him your money for usury, nor lend him your food at a profit.

 

[quintets]

Rats. Hit submit instead of preview.

Here's a site on usury through the ages.

History for Kids - Usury

Apparently, by 1300, the Islamic banks lent on the basis of business partnership rather than usury.

That's the way the banks nowadays would like to view the relationship. But sometimes I just think they're in it for the USE-ary.

 

[man of action!]

Thanks

Thanks guys.

I guess it is kinda like a wrap but no interest is applied.

The issue was not so much what happens if they stop paying all together, but what happens if they stop, miss two or three payments and then continue on.

This might even happen several times over the entire term.

With no ( penalty ) interest to charge, would other fees be acceptable?

 

[gniks]

I tried to nut this out once

Man of action (long time no hear)

I tried to put something together for a chap and his wife a few months ago whereby I could provide them with a home using a Shariah-compliant method. I tossed around a lease-option that involved a market rent (can't pay above market rent) together with a weekly admin fee that ended up in reality equating to the house repayment that would have been created with a P/I loan on the house price.

Then, as you say, after 25 years the option strike price is zero.

We got a fair way through it, and he kept checking with his cleric, but we got stuck on house insurance. I wasn't prepared to have the house uninsured, but insurance is seen as a "usurious" transaction by the cleric and is therefore not permitted. Which was interesting because they ran a business and I figured they must run it without any insurance, but how do they meet Workcover etc?

Anyway, we left it there. I really enjoyed the challenge of trying to solve their problem and they were the loveliest couple.

Cheers

gniks