Islamic mortgages and banking: you learn something new each day

I’d heard a news item on NPR a while ago on Islamic mortgages, and not being Muslim (or, to be honest, well-versed in religious beliefs of any sort), I found the discussion very interesting, since it offered a perspective I was unaware of until then.

Suppose you’re in the market for a new house. Unless you’ve got enough cash on hand to buy the house outright, you would typically obtain a mortgage, which, like most loans, requires that you pay back the amount that you borrowed with interest.

But interest-based loans are not in compliance with Muslim principles known as Sharia, which emphasizes partnership and the fair sharing of risks and rewards between parties, since charging interest is seen as violating this principle.

So what would you do? In the last few years, financial institutions have started recognizing the need to provide services for this market. Under one possibility, the bank buys and retains ownership of the property the borrower is interested in. Borrowers then make rent payments to the bank, much like they would do if they were leasing an apartment and making payments to the landlord.

Upon payment of the final rent amount, the borrowers become owners of the property. This setup works because the payment of rent is not considered the same as paying interest. The former is considered payment for use of the property while the latter is a charge for borrowing money.

Many multinational banks and institutions such as HSBC have begun offering financial services, including mortgages, banking, insurance, and investment vehicles, that are in compliance with Sharia. But a quick search suggests that most of them are in the UK and overseas. If you’re interested in learning more on this topic or finding an institution that provides Islamic banking services in your area, consult the Institute of Islamic Banking and Insurance, which offers a list of institutions offering Islamic banking services by country.

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