[Haq al lugi]

The Associated Press reports from Minneapolis on a story that is sure to get anti-Muslim paranoiacs worked up: "To help close the home ownership gap among Muslim immigrants, the state's housing agency has launched a new program offering Islamic mortgages."Shariah, or Islamic law, forbids the paying or charging of interest, so Shariah-compliant financing instruments structure transactions in order to avoid interest. The AP describes how an Islamic mortgage, also known as Murabaha financing, works:

The state buys a home and resells it to the buyer at a higher price. The down payment and monthly installments are agreed to up front at current mortgage rates.

The deal is identical to a thirty-year fixed-rate loan, except there's no additional interest, because the higher up front price factors in payments that would have been made over the life of a traditional mortgage.

A handful of private banks and lending institutions offer Islamic mortgages in the U.S., but Minnesota Housing is the first state agency to offer such a product. The program is the brainchild of Hussein Samatar, director of the African Development Center in Minneapolis.

"The process is different, but the outcome will look the same," Samatar said. "We wanted to be as conventional as possible, while respecting the tenets of Islam."

In other words, an Islamic mortgage is identical to a normal mortgage except that the entire payment is called "principal" instead of part of it being called "interest."

Since mortgage interest is tax-deductible and principal is not, one assumes this means that borrowers with Islamic mortgages end up paying considerably more for the same house than those with regular mortgages. (The AP does not answer this obvious question.) If the law provided for an equivalent tax break for Islamic mortgages, however, presumably Shariah would permit Muslims to take advantage of it, since the ban is on interest, not tax advantages.

In other words, an "Islamic mortgage" is really just a loophole. Those who take them out are effectively paying interest but calling it something else. They are complying with Shariah only on paper.

[Cyra]

I think the last line speaks volumes. Can't wait to hear what others have to say.

[Masood]

Actually, according to our tax accountant who checked this for us a few years ago, the IRS does allow you to deduct the interest on these sharia mortgages. Even though it is not called "interest", the IRS recognizes that the costs are basically the same thing.

You're paying to use someone else's money. Or if you are a lender, you are earning money by letting someone else rent your money.

[Jim]

In other words, an "Islamic mortgage" is really just a loophole. Those who take them out are effectively paying interest but calling it something else. They are complying with Shariah only on paper.

no, they are not a loophole.

You dont get the accumulatinve interest upon interest (falsly inflated) or the interest on penalties, etc.

It is a set price, that is it. Straight up dealing no unknowns or inflations.

[Masood]

no, they are not a loophole.

You dont get the accumulatinve interest upon interest (falsly inflated) or the interest on penalties, etc.

It is a set price, that is it. Straight up dealing no unknowns or inflations.

I don't know about this plan in Minnesota, but the two contracts that I reviewed actually did include penalties for late payment. And, of course, foreclosure provisions.

And if you looked at the termination provisions, they were exactly like a normal fixed rate loan (except the effective rate was about 1.5% above market rate at the time)

Hopefully that has changed since then. Do you have a more recent contract template that you could post?

[LtTony]

You dont get the accumulatinve interest upon interest (falsly inflated)

???? Explain please.

[Rhoda]

Isn't a 'sharia mortgage' like this?

http://en.wikipedia.org/wiki/Land_contract

If they were called 'land contracts' would they be more acceptable to the anti-Muslims?

The hypocrisy can be dealt with in the afterlife.

[Jim]

I don't know about this plan in Minnesota, but the two contracts that I reviewed actually did include penalties for late payment. And, of course, foreclosure provisions.

And if you looked at the termination provisions, they were exactly like a normal fixed rate loan (except the effective rate was about 1.5% above market rate at the time)

Hopefully that has changed since then. Do you have a more recent contract template that you could post?

Im not sure about the Islamic guidelines for penalties (if it is even allowed; it could be a debatable issue, I dont know), however, there is no cumulative interest on any of the penalties or the original purchase price of the loan or principle itself. The basic fundamental of an Islamic loan is there is no ballooning process (intitial interest or interest upon interest) in the initial agreed purchase price or principle.

[Jim]

???? Explain please.

If you get a loan at a set interest rate (say, a car loan) and default on your payments many loans you end up paying interest on your overdue (accrued) interest. Your payments you make in the first few years of your loan (depending on the loan) go to pay interest, not the principle, but you still owe the principle including interest and can be charged interest on both your principle and the interest you owe. Of course this is through a process of collections at this point.

I had a student loan and a car loan like this many years ago. It becomes almost impossible to catch up on.

Another issue is that of ownership. Islamic finance if done properly wil give you ownership of what it is your purchasing with loaned money. With a regular bank loan, your bank owns what they lend you money for until you pay off the loan. Thus if you default on an Islamic loan, it is the money they come after you for and cannot repossess your property and leave you with nothing (effectively stealing what money you already paid into the property (or other type of) loan). In a regular loan they take everything and leave you high and dry as well as oweing the reaminder of the loan and inflated interest.

[Rhoda]

Islamic finance if done properly wil give you ownership of what it is your purchasing with loaned money.

Confused!

I thought lending or borrowing was not allowed. Period.

[Masood]

If you get a loan at a set interest rate (say, a car loan) and default on your payments many loans you end up paying interest on your overdue (accrued) interest. Your payments you make in the first few years of your loan (depending on the loan) go to pay interest, not the principle, but you still owe the principle including interest and can be charged interest on both your principle and the interest you owe. Of course this is through a process of collections at this point.

I had a student loan and a car loan like this many years ago. It becomes almost impossible to catch up on.

Another issue is that of ownership. Islamic finance if done properly wil give you ownership of what it is your purchasing with loaned money. With a regular bank loan, your bank owns what they lend you money for until you pay off the loan. Thus if you default on an Islamic loan, it is the money they come after you for and cannot repossess your property and leave you with nothing (effectively stealing what money you already paid into the property (or other type of) loan). In a regular loan they take everything and leave you high and dry as well as oweing the reaminder of the loan and inflated interest.

But, Jim, again the issue here is so-called sharia compliant mortgages available in the market today. Not in theory, but in actual practice.

The actual contracts I have reviewed do allow the lender to foreclose the mortgage. They do have an amortization schedule just like any other loan (where the lenders equity declines at an increasing rate over time). And they do have "fees" for late payments which do compound.

I think that's what makes people wonder what is "Islamic" about these loans that are out there in the market.

I would be very eager to review other contracts like you have described. I've tried now for a few years, with zero success, to try to get a Muslim student loan program going. And so we've looked at all sorts of "sharia-compliant" loans in different verticals to model our program after, both in western countries and in the ME. And we haven't found anything that is honestly and substantively different from normal loans or leases. If you've found something else, I would love to see the contract.

I haven't been able to get any imam or scholar here or in the UK or in Saudi to give me anything substantive on this. After trying for years.

This post has been edited by Masood: 15 March 2009 - 06:41 PM

[LtTony]

That's because it is probably all smoke and mirrors, masood. Smoke and mirrors.

Jim, you may have more finance knowledge than me, but not by much, and that is not saying a lot. I'm just not buying it; nobody is -- literally. Terms are tilted in the banks' favor, yes. Heavily so under the circumstances you described -- default. Keep up your payments, and a home mortgage is often a great investment for the consumer. Credit on other goods, not so much.

[Jim]

Confused!

I thought lending or borrowing was not allowed. Period.

lending and borrowing is allowed.

[Jim]

But, Jim, again the issue here is so-called sharia compliant mortgages available in the market today. Not in theory, but in actual practice.

The actual contracts I have reviewed do allow the lender to foreclose the mortgage. They do have an amortization schedule just like any other loan (where the lenders equity declines at an increasing rate over time). And they do have "fees" for late payments which do compound.

I think that's what makes people wonder what is "Islamic" about these loans that are out there in the market.

I would be very eager to review other contracts like you have described. I've tried now for a few years, with zero success, to try to get a Muslim student loan program going. And so we've looked at all sorts of "sharia-compliant" loans in different verticals to model our program after, both in western countries and in the ME. And we haven't found anything that is honestly and substantively different from normal loans or leases. If you've found something else, I would love to see the contract.

I haven't been able to get any imam or scholar here or in the UK or in Saudi to give me anything substantive on this. After trying for years.

Thus why many Muslims who know better do not view so called "Islamic Mortgages" as Islamic Mortgages.

Many scholars themselves are not scholars in Islamic finance. I have only known two in my 12 years of studying Islam.

[Jim]

That's because it is probably all smoke and mirrors, masood. Smoke and mirrors.

Jim, you may have more finance knowledge than me, but not by much, and that is not saying a lot. I'm just not buying it; nobody is -- literally. Terms are tilted in the banks' favor, yes. Heavily so under the circumstances you described -- default. Keep up your payments, and a home mortgage is often a great investment for the consumer. Credit on other goods, not so much.

A judgment that you are not qualified to make.

[Masood]

Thus why many Muslims who know better do not view so called "Islamic Mortgages" as Islamic Mortgages.

Ok, yeah, that was sort of the point that I was trying to make. I would like to see what a real "Islamic Mortgage" looks like, but I haven't found one in reality yet.

Many scholars themselves are not scholars in Islamic finance. I have only known two in my 12 years of studying Islam.

If you are still in touch with those two, have you ever discussed Islamic education finance with them? Would it be possible for you to ask them?

This is a really underserved market. I know a lot of Muslim kids who can't go to college because their parents will not accept (or allow them to accept) traditional student financing.

On the other hand, you have people who are willing to lend to these kids. (like me for example and other people I know).

So the question is, how can this be done in a way that is consistent with Islam?

This post has been edited by Masood: 16 March 2009 - 08:56 PM

[LtTony]

A judgment that you are not qualified to make.

And neither are a good number of muslims, as you admitted.

Further, when you take out a mortgage on a home you own the home. You get a deed to the property it is yours. You agree to permit the lender to place a lien on the property and you use the home as collateral. It is not correct to say the bank owns the home when you get a mortgage.

Lastly, in a sharia compliant loan, what happens if a person quits making payments on a house or car, for example?

[Faaz]

Salaam everyone

Here is how a sharia complaint mortgage suppose to work.

Lets say you want to buy a home for $100,000

you pay $20,000 down and the Islamic bank pays $80,000 to buy the house.

Lets say the same house in the Market would bring $1000/month rent

you will pay that to the bank and it will apply $800 as it share and $200 as your share of the rent that 200 will reduce the equity of the bank and next month thier equity would be 79,200 and your's will bee 20200 so each month your equity will be increased by the proportion of the rent share you have in it. when you sell the house say after a year you and the bank would have to share the sales proceed in the proportionate amount whether it sell for 110000 or 90000. The longer you own the house the more equity you would have.

That is the true sharia compliant financing, the sharia complaint mortgages we have in US are not exactly done this way but close enough I guess.

Faaz

[Rhoda]

Interest by any other name will smell as sweet.

Romeo and Juliet IIii

[LtTony]

Hello, Faaz.

You may be on to an explanation that I can understand. However, I'm not clear on a couple things.

"you will pay that to the bank and it will apply $800 as it share and $200 as your share of the rent that 200 will reduce the equity of the bank and next month thier equity would be 79,200 and your's will bee 20200 "

What am I missing? The bank equity and owner equity add up to $99,400, not $100K. Shouldn't they?

I assume if the owner sells the home for less than the purchase price, both the owner and bank share the loss. But if the owner stays in the home long enough to own it free and clear, how the bank make money? Fees up front?

I also assume that this type of financing is essentially all that is available in muslim countries. Correct?

Also, what happens if a borrower defaults on a loan?

Thanks.