Wednesday, August 10, 2005

ISLAMIC MORTGAGES: Faith, finance forge new path

Kim Norris of the Detroit Free Press presents an interesting look at Islamic Mortgages. Islamic mortgages are different than traditional mortgages since many Muslims believe interest is wrong.

ISLAMIC MORTGAGES: Faith, finance forge new path: "In Islamic mortgages, an intermediary such as a bank buys the property, and the homeowner eventually obtains the home through a lease-to-own arrangement."

A few interesting tidbits from the article:
"The biggest barrier to developing so-called Islamic financing in the United States is the absence of a secondary market for these products. Typically when banks loan money for houses, they sell those loans to investors who profit by collecting the principle and interest.

Ranzini said University Bank must hang onto the Islamic mortgages it writes as well as title to the homes. That limits the volume of loans a bank can make."

Home insurance can also a be problem for the "borrowers" since they technically do not own the home. In the article Norris writes of a Muslim couple who experienced this problem:
"some problems when they tried to buy homeowners insurance -- something necessary to obtain a mortgage. Insurers would not recognize the Islamic mortgage as a standard mortgage. Instead, they insisted that since the trust owned the house, Solaiman and Metzger were only eligible for renters' insurance."
This may be changing however since in Michigan at least, the "Office of Financial and Insurance Services...OFIS issued a clarification saying that Islamic mortgages qualified for homeowners insurance just as a traditional mortgage does."

Ironically, what the article does not say is that the mere presence of insurance can be problematic for the most fundamentalist of Muslims. From Islam.org:
"Our scholars are not in agreement whether insurance is permissible (Halal) or prohibited (Haram). Since insurance as it is being practised now did not exist during the Prophet's time, Ijtihad is used to determine whether it is permissible or otherwise. As the scholars are not in agreement as to whether insurance is permissible or prohibited, they are also not in agreement as to reasons for its prohibition."
Total disclosure here. I was consulted by Kim Norris for her article. Among the topics we discussed were that the idea of that interest being bad is not new or unique to Islam. Christians had the same debate about 900 years ago.

From Newschool.edu (I highly recommend reading it!!!):
"Although clerics had been prohibited from lending at interest at least since the 4th Century, the ban was not extended to laymen until much later. In 1139, the Second Lateran Council denied all sacraments to unrepentant usurers and, in an 1142 decree, condemnedany payment greater than the capital that was lent."
Interestingly (no pun intended) Christians decided that interest was fine so long as it was not punitive (hence the term usury). It will be interesting to see (and unfortunately it will probably be after any of our lifetimes) whether Muslims decide likewise.

I have tried to understand why any religion would not allow any interest and I can not. I realize there are scripture readings (in many religions--see Wikipedia) against it, but I confess I do not understand the logic behind them. The ability to borrow (i.e. access to capital) can be amazingly beneficial and while equity might be better in some regards, limiting supply seems an interesting way of making helping the poor. Indeed, it could be said that religions would want to increase this access to money to help lift the poor from poverty.

The only explanation that makes sense to me is that debt can become a burden (too much of a good thing) and can lead to short-term thinking. But that is more an indictment of excessive debt. So maybe we should be against predatory lending and not all lending.

I would love some help on this one.

BTW Don't forget to check out the Detroit Free Press' article!

Also one of the best articles I have ever found on current trends in Islamic Finance is still available at Dinar Standard. A Great read!

3 comments:

Mahmoud El-Gamal said...

Please see discussion of mortgages on my blog. This is the link to my main discussion, but I have included other related discussions in later posts.

Best regards, Mahmoud.

Anonymous said...

I found your blog interesting; you asked for some
information about why
interest was forbidden. Historically most people were
subsistence farmers.
There was little need for capital. The only time
somebody borrowed money
was when they were having problems and were in need of
charity rather than
loans. They would probably have a hard time repaying
the principal let
alone interest. Hence the sympathy for these people
led to the rules of no
interest.

Almost every religion had such rules and also had
methods to overcome these
rules. In a number of Islamic countries the lender
takes an interest in the
venture that is being financed. The borrower must
purchase the "lender's"
share of the venture at some point in the future.

In Judaism there is the Sabbatical year; all
outstanding loans must be
forgiven during the Sabbatical year which occurs every
seven years. Thus
nobody would lend anything prior to a Sabbatical year.
This was overcome
through some revisions in how the loans were treated.
Again the origin of
the rule had to do with the fact that the borrowers
were generally poor
farmers and not "capitalists."

Also keep in mind that interest rates were extremely
high because of the
difficulty in collecting loans, especially money
loaned to the local
ruler/despot.

The rules about interest changed in Christianity when
commerce became more
prevalent and when people saw the profitability of
lending.

I hope this was somewhat informative.

JK

alberthaanstra said...

Hi Blogger! Ik ben op zoek naar een geldlening Zou Afab echt zo goed zijn als iedereen beweert? Of kan ik beter zoiets als Geldshop proberen?

Groetjes Albert