Tuesday, May 13, 2008

An Islamic Mortgage in Your Future?

A Higher Law For Lending”? Or just word games? Stripping away the Washington Post’s marketing fluff, it’s just word games.

Islamic law forbids interest payments and financial structures that charge rent for money. However, you can’t outlaw the laws of economics – no return to capital, no investment. So, there’s some sort of legalistic dodge coming up:

The article outlines sharia-compliant methods for the Islamic mortgage banker when faced with an application: Buying the house on the market, marking up the price, and then reselling to the new homeowner. The second is to buy the house on the market, and then set up a rent-to-own agreement with the new buyer.

In both cases, you guessed it, the markup is very similar to the expected interest payments.

Interesting note, not all Islamic scholars agree with the need:

“Mahmoud Amin el-Gamal, an economics professor at Rice University specializing in Islamic finance, noted that even in Muslim countries, sharia-based financing was developed in only the past several decades. And he argued that because conventional mortgages are secured by a physical good, namely the home, that is usually the only asset the lender can repossess if the borrower fails to repay, such loans should not be considered the equivalent of making money by renting money.

In any case, el-Gamal maintained, Islamic home-finance products are so closely modeled on conventional mortgages as to constitute a distinction without a difference.

‘This is an industry that preys on people's religious insecurities by selling them a product that they claim is different when it's not. It's false advertising, and it's a case of supply creating demand,’ El-Gamal said. “