Muslim mortgages: Bucking the credit crunch

Tuesday, 30 September 2008 12:00

As standard mortgage lending is falling amid the credit crunch, one area is holding up: Muslim mortgages.

Muslim finance has seen massive growth in recent years with Sharia products as diverse as insurance, mortgages, investments and bonds coming on the market.

But it is the credit crunch that has now created a new lease of life for Muslim finance.

Growth for faith-based finance

Up until 2002, only the United Bank of Kuwait offered Islamic mortgages in the UK, but recent years have seen substantial growth in the sector with a number of high street lenders – including HSBC and Lloyds TSB – also now provide Sharia-compliant products to cash in on the area.

Mainstream banks have simply moved into the sector as they see the UK’s two million Muslim as an area of growing demand.

Last year, a Financial Services Authority (FSA) study into Islamic finance found “huge potential for an expansion of Islamic offerings in the UK’s financial markets” and Lloyds TSB reports demand remaining strong in the current financial turmoil.

Muslim mortgages have also been aided by changes to stamp duty. Previously someone buying a home with a Sharia-compliant mortgage had to pay stamp duty twice – at the beginning of the deal and when the mortgage was completed. Without this double tax, Muslim mortgages have become more affordable.

Value for money?

But do Sharia-compliant mortgages really offer value as well as standing up to moral demands?

Emile Abu-Shakra, at Lloyds TSB which has a range of Muslim mortgages, explains it was a myth that Sharia-compliant mortgages come at a cost.

“In the early days when they were first available, Muslim finance was more expensive, but that is not true now,” he says.

“They are never going to be the cheapest on the market – where they are hundreds of standards mortgages and limited numbers of Muslim mortgages – but they are far from being the most expensive mortgages on the market.”

Meanwhile, Stephen Amos at the Islamic Bank of Britain claims as demand has grown for Muslim mortgages and home purchase plans, so the deals have become more competitive and have entered the best buy charts.

Under such mortgages, a home loan company will buy a property on behalf of a client – contributing up to 90 per cent of the purchase price. The customer then pays the remaining percentage upfront (like a deposit) and repays the outstanding amount over an agreed term, together with a rental payment.

Rental payments are meanwhile linked to the LIBOR or another index- rising and falling with it – and reduce over time as more of the property is purchased.

Beating the credit crunch

Islamic finances offers a more conservative approach to finance, compared to the web of subprime mortgage-back assets that have led to global economic crisis, and in the current downturn this prudent outlook is predicted to see growth,

Accounts BDO Stoy Hayward point to the fact Islamic banks are one of the few financial institutions that still have significant sums of money available to finance individuals and businesses.

Islamic institutions have steered clear of the money markets that have caused the credit crunch by drying up – instead they only raise funds through depositors and shareholders. This gives them liquidity, when other banks are finding their funds drying up.

Dan Taylor, head of banking at BDO Stoy Hayward, explains: “Growth of Islamic banking in the UK will be attributed to their more conservative approach to financing, as the risks are shared with the investor, much like the private equity model.

“In addition, it is more difficult for Islamic financial institutions to use leverage; therefore their risk profile is naturally lower,” continues Mr Taylor.

Currently 20 major global banks operating in the UK have set up units to provide Islamic Financial Services. They have been joined by five stand-alone Islamic banks.

This compares with Switzerland which has five Islamic financial institutions and France and Luxembourg with four each.

“In light of the market turmoil, we could expect the number of stand alone Islamic financial institutions present in the UK to double over the next three years, further reaffirming London’s position as the pre-eminent centre of choice for the provision of Islamic Finance,” Mr Taylor predicts.

Really ethical?

Muslim mortgages have come under fire from some quarters for just being a standard mortgage, but under a different name.

Mr Amos at the Islamic Bank of Britain, however, denies this, claiming more education is needed to what Islamic finance really offers.

“In the Middle East people trust Islamic products, but in Europe we have to educate people to Islamic principles.

“Once you sit down with a client and explain how the mortgage works they see it is completely different. It is the processes behind the deal that are different.”

Mr Amos added a key difference was that Islamic institutions work in partnership with clients and investors.

“While big banks were looking at customers with greedy eyes, we like to establish partnerships and provide services entirely right for the customer.”

This has also helped to Islamic banks to avoid the credit crunch – as while institutions around the world suffer the burden of subprime customers failing to pay their loans, default levels for Sharia-complaint mortgage are much lower.

The ethical side of Muslim finance – with no investments made in firms that deal in arms, alcohol or pornography – also attracts non-Muslim customers, Mr Amos says.

The ethical side of the business also runs to how banks make money. The Islamic Bank of Britain for example refuses to profit from bank charges. While late paying customers do face penalties, the charges are passed on to charity; something the bank itself does not publicise so as not to profit from it.

With the traditional mortgage market slowing and banks running out of cash, the prudence of Islamic banking – coupled with Muslim mortgages becoming more competitive – means out of the ashes of the credit crunch turning to faith to buy a property could be a savvy move.

Daniel Barnes

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