The Islamic Mortgage is a trend which is broadening the home ownership base, particularly amongst Muslims. However, you do not need to be a Muslim to take advantage of the Islamic mortgage schemes which exist. Muslims make up 5% of the UK population and it is predicted by Data Monitor that the Islamic mortgage market could be worth £4.4 billion within the next two years.
An Islamic Mortgage is an ethical mode of finance, which derives its principles from the Quran (The revealed book of Muslims) and tradition of the Prophet Muhammad (pbuh). Shariah law (Islamic law), which is based on the Quran and Sunnah, governs Islamic finance. These guidelines also include prohibitions from investing in areas such as Defence and Armaments, Casinos, Breweries – areas which are considered to be value destroyers. The goal is not equality but an avoidance of gross inequality along with an injunction that wealth should not become “a commodity between the rich among you”.
Shariah law regards the practice of paying or receiving interest (Riba) as unacceptable and it is forbidden. A Shariah home loan provides a Halal (permissible) alternative to an interest based mortgage by allowing individuals purchase their own homes without having to pay interest. As a consequence, two types of mortgage have evolved that are compatible with shariah law:
Ijara – the bank purchases the property and then rents, rather than sells, it to the homeowner. The amount of rent is agreed between the bank and the tenant at the outset and can be based on a LIBOR plus a spread formula.
Murabaha – the bank buys the property at a set price and immediately sells it on to the client at a higher price. This is paid back in instalments and deemed to be a sales transaction, rather than one of lending, and is similar to a fixed rate mortgage.
The UK Market
We currently have a number of financial institutions that undertake Islamic Mortgages within the UK; on the residential side Bristol & West have teamed up with the Arab Banking Corporation to launch Alburaq Islamic Home Finance, and West Bromwich Building Society is acting as an introducer for the Ahli United Bank’s (formerly the Bank of Kuwait) range of Islamic mortgage products. Meanwhile, HSBC has launched Amanah Home Finance which as well as dealing with new borrowers, also allows Muslims with a traditional interest-based mortgage to refinance their property in accordance with Islamic principles. At the same time United National Bank (a Pakistani Bank with branches across the UK) also has an Islamic mortgage product. Whilst on the commercial side, specific products which meet the shariah requirements; these are currently provided by Natwest RBS (ABT finance) and Bank of Ireland (Amaar).
Issues that remain unanswered
One barrier that has been removed from the Islamic market is the problem of double stamp duty. Previously stamp duty was paid once when the bank bought the property and again when the buyer purchased the property from the bank. The Treasury abolished double stamp recently which now allows the payment to only be made once.
An issue that remains unsolved is that of insurance both to protect payments in the event of sickness or unemployment and also to insure the building itself. Products such as income protection or accident, sickness and unemployment protection would be unsuitable for most Muslims as they are based on uncertainty. Gharar – which means uncertainty, hazard, chance, risk or ambiguity – is prohibited in Islam and the sale of something where the consequences or outcome is not known is not allowed.
In the Middle East Takaful is used as an alternative to insurance; recently HSBC Amanah have launched shariah compliant Insurance products within the UK. Takaful is a form of Islamic insurance based on the Quranic principle of Ta-awon or mutual assistance. It provides mutual protection of assets and property and offers joint risk sharing in the event of a loss by one of its members. Takaful is similar to mutual insurance in that members are the insurers as well as the insured. Some scholars have allowed individuials to take on conventional building insurance whilst no real alternatives exist. But some might think they are compromising their beliefs
Seeking State help is difficult for Muslims if they are unable to pay their mortgage due to accident, sickness or unemployment because State benefits are based on mortgage interest payments. Islamic law does not stop people applying for benefits but the lack of Islamic products in the UK means social security benefits are not appropriate and a working party has been set up to discuss this with the Government. The Government is currently considering ways of providing the support for Islamic mortgages similar to the help available for mortgage interest payments. But it is a complex area and would involve legislation.
Another problem still faced by the UK’s Muslim community is that of entry into shared home ownership schemes and right-to-buy. Council properties bought via the right-to-buy scheme or housing association homes cannot, at present, be Shariah compliant as they need to be purchased by the tenant, rather than the bank. In shared ownership schemes, the lessee acquires only a share of the property and pays rent to the housing association on the remaining share. Gradually, the tenant may buy further shares until it owns the property outright.
Properties bought under shared ownership cannot qualify for Shariah compliant mortgages because the lessee still needs a loan and is not in a position to sell or lease the property under the terms of such transactions. There needs to be changes to legislation to allow this to happen. The Office of the Deputy Prime Minister (ODPM) have stated that the Government was examining ways of assisting Muslim social tenants and others in housing to access the full range of low cost housing ownership schemes.
The Islamic mortgage market and Islamic finance in general is predicted by many analysts to have a substantial growth rate over the next five years. We will see the range of Islamic mortgages on offer growing as well as the overall repayment and libor rates becoming more competitive in line with the conventional mortgage market. New lenders and financial partnerships with high street retail lenders are more likely to occur. We will also see a surge in cross selling of other Islamic finance products such as insurance, investments, pensions and commercial finance.