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!