The Washington Post recently did an interesting piece on the growth of Islamic mortgage lending in the United States.

Some excerpts from the article:

The mortgage industry may be in meltdown, but at least one class of lender appears to be flourishing: Islamic finance companies that offer Muslim home buyers alternative arrangements such as lease-to-own deals so they can avoid making the sort of interest payments that many believe their religion forbids.

Officials at Guidance Residential, a Reston company that has financed more than 5,000 home purchases since it began in 2002, said the company is having its best year yet, with business up 7 percent in the first quarter of 2008 from the first quarter of 2007.

At University Islamic Financial, which began in Ann Arbor, Mich., and expanded its operations to Maryland, Virginia and five other states last year, officials said the number of home-financing applications quadrupled from last March to this March.

The article goes on to profile a number of Muslim individuals and families who have applied for or have utilized these Islamic lending products. Customers include both men and women, immigrants and USA-born Muslims.

Amr Mohamed, a representative of Guidance Residential, points out that if a customer is late on payments, Guidance charges him or her a flat administrative fee to cover processing costs but none of the percentage-based penalties and additional fees that conventional mortgage companies can pile on. This is an important selling point in these times of foreclosure fears and fall real estate valuations.

Lenders are also displaying a sudden surge of interest in Islamic products, perhaps because, as the article points out, Islamic products “got a major boost in 2001 when Freddie Mac agreed to begin buying them on the secondary market, ultimately including not just Guidance and University Islamic, but also Devon Bank in Chicago and American Finance House Lariba of Pasadena, Calif. Last year, Freddie Mac bought more than $250 million in Islamic home loans… according to spokesman Brad German.”

The article concludes with a comment that summarizes the attitude of many American Muslims:

Rizwan Jaka, 35, president of the All Dulles Area Muslim Society and one of the first to buy a home with Islamic financing in the Washington area, said the emergence of such arrangements constitutes an important milestone in the integration of Muslims in the American mainstream.

“It definitely marks a coming of age for us. . . . It’s part of the whole process of being a part of this country while being able to have our faith accommodated,” he said. “The American dream is to purchase a house, and the American Muslim dream is to be able to do so in an Islamic manner.”

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Via moneyhighstreet.com, March 16 2008:

There is nothing to stop anyone from opting for an Islamic mortgage if they feel it is the best product available to them, an industry expert has said.

Emile Abu-Shakra, media relations manager at Lloyds TSB, explained that the popularity of Islamic financial products had increased in recent years.

He said that available Islamic financial products meet Muslim rules but could be used by anyone who felt they were appropriate.

“These products are designed with Muslims in mind and are designed to meet the needs of Islamic principles but there is absolutely nothing to stop anybody else taking an Islamic mortgage or Islamic current account,” Mr Abu-Shakra added.

“I don’t think there will be an effort to encourage others to take them out - the fact is that they are designed for a particular market but anyone who thinks they [Islamic mortgages] fulfil their needs can have them.”

Late in 2007, the Financial Services Authority (FSA) said that it was looking at ways to encourage the availability of Islamic financial products, including Ijara mortgages.

It explained that consumers opting for these Islamic mortgages now had the same level of protection as people using traditional home loans.

It’s a good idea for Mr. Emile Abu-Shakra to point this out. There are certain elements of society in Europe and North America who complain about the introduction of any kind of Islamic service, particularly when it falls outside the scope of simple religious services. They see it as special treatment. So it’s good to remind people that new Islamic services such as Islamic mortgages are available to anyone and are actually a form of relief from the burden of interest. In other words, it’s a good deal for anyone, Muslim or not.

In fact I have read that in the UK many Sikhs take advantage of Islamic mortgage plans. They see traditional interest-based loans as oppressive, so they consider Islamic mortgages to be a good option.

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via IslamOnline.net:

CAIRO — A £1bn Shari`ah- compliant loan will turn a landmark military property at the heart of London into a luxurious residential compound, a groundbreaking project for Islamic finance dealings with real estate in Britain.

“This is the most important redevelopment scheme in London in the last 50 years,” Christian Candy, co-owner and founder of the property developer firm (CPC), told the Guardian on Monday, March 3.

Candy’s firm will use a £1.3bn loan from the Qatari Investment Fund to transform the historic Chelsea barracks in central London into a residential compound. Under the scheme, the 12.8 acre of concrete army buildings in the ritzy Chelsea neighborhood will turn into luxury flats, a hotel and health spas, with the help of Qatari Diar, the giant real estate company and the property arm of the fund. The 3.5-year-loan will comply with Islamic finance rules as it is structured in an Ijara structure, or lease agreement, whereby rent is paid on the borrowings, rather than interest payments.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships. Islam forbids Muslims from receiving or paying interest on loans. Islamic bankers and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Groundbreaking

The project is seen as breaking new ground for Islamic finance in Britain. Developers say the deal would be the largest Shari`ah-compliant financing on a property in the UK.

“The financial structure developed here has allowed us to deliver a truly innovative financing solution for the global real estate sector,” said Patrick Chenel, chief financial officer for Qatari Diar.

“We have broken new ground with our advisers by creating and setting up Islamic financing of a scale not seen before in a major real estate acquisition in [the] UK.”

Mark Payne, partner at the international law firm Clifford Chance which structured the deal, agrees.

“This will open people’s eyes to the possibilities for Islamic financing to help business in the UK,” he told the Financial Times.

He believes the deal will show that Islamic financing is “possible on a wide range of assets.

“We will certainly see more of these types of deals.”

Islamic finance is one of the fastest growing sectors in the global financial industry. Beginning almost three decades ago, it has made substantial growth and attracted the attention of investors and bankers across the world.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

Britain, home to nearly two million Muslims, is seeking to become a hub for Islamic finance. It is already home to the world’s first qualification center — the Islamic Finance Qualification (IFQ) — which covers all aspects of the industry.

(Reported on IslamOnline.net) 

It’s great to hear about Islamic financing being used for these kinds of deals (and rather ironic that the developer’s name is Christian).

It seems most of the Islamic financing deals I hear about are huge projects like this, which is good as far as it goes.

Insha’Allah I’d like to hear about this kind of Islamic business financing becoming available to smaller entrepreneurs as well, for example in the $50K to $500K range.

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Via Pakistan’s Online News Network today:

KARACHI: Governor State Bank of Pakistan Dr. Shamshad Akhtar has said that Islamic Banking industry is showing promising signs of sustainable growth. She expressed these views while briefing the media while inaugurating Meezan Bank’s 100th branch here on Thursday.

She said that the beauty of Islamic finance system is that if it is adapted in letter and spirit it is the most transparent and ethical system of finance. She said that Islamic finance system has a great potential to meet the financial requirements of society at large and would continue to grow its market share exponentially in the years to come in Pakistan…

Speaking on the occasion Mr. Irfan Siddiqui, President and CEO of Meezan Bank said that Meezan Bank, the first and largest Islamic Bank in Pakistan is committed to fulfilling its vision of establishing Islamic Banking as banking of first choice. He said that Meezan Bank is now present in 31 cities of Pakistan and branch expansion will continue during 2008 making the Bank one of the fastest growing Banks in the history of Pakistan…

The article offers additional specifics about the growth of Islamic banking in Pakistan. What really caught my eye in Dr. Shamshad Akhtar’s comment that the Islamic banking system ” is the most transparent and ethical system of finance.”

That’s absolutely true and it’s a fact that is often overlooked in discussions about Islamic finance. Islamic finance (revolving around the prohibition of ribaa but not confined to that) is not just a quirk of Islamic law. It’s not just a modern innovation designed to allow Muslims to follow the Shari’ah. It’s not just a “new alternative.”

Islamic finance is, at its heart, the most productive, honest and ethical system of finance for humanity. That’s the whole point. It is a system of finance that does not exploit the poor, or take advantage of anyone. It allows investors to profit in a free market system without oppressing anyone.

So am I saying that the interest-based system that dominates world markets is oppressive? Of course it is! Just look at what is happening today with the sub-prime mortgage crisis in the United States. Millions of people are losing their homes. Look at the huge burden of debt carried by many third-world countries, who spend as much as 30% of 40% of their GNP to simply pay the interest on massive loans. The interest-based system is inherently oppressive.

All Islamic laws and systems have been designed for the benefit of humanity as a whole, and this includes the Islamic finance system. It’s good to remember this fact in any discussion of Islamic finance. It’s great to hear that it is growing worldwide and even becoming the dominant system of finance in some countries.

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Via Manama, Bahrain, Gulf Daily News:

MANAMA: Islamic banks face specific categories of financial risks compared to conventional banks, says an industry report.

According to research by Moody’s Investors Services the most critical risks are entanglement and displaced commercial risks.

“The first one reflects the fact that each Sharia-compliant transaction tends to include credit, market and operational risks, all of which we need to understand to better fine-tune our analysis,” the report by the financial research and analysis group said.

“Islamic banks are improving the way they identify, measure, control and mitigate those risks, as balance-sheet and capital management is becoming a critical field where investments in technology and human talent are increasing”

“Beyond financial risks, Islamic banks are also subject to other forms of risks, specific to their business models.”

It argues these are reputation risks and the risks of being perceived as not sufficiently Sharia-compliant.

“This has a powerful disciplinary effect, but could become harmful should the market perceive any form of incompliance,” it adds.

The report identifies five possible weaknesses in these institutions.

These include the range of asset classes found in Islamic banks and the relatively weak position of investment account holders.

“The importance of the Sharia supervisory board and the bank’s ability to provide the board with adequate information as well as abide by its rulings, is also an issue as is rate-of-return risk and new operational risks.

“Notwithstanding that the Islamic Financial Services Board’s endeavour to provide the Islamic banking industry with a set of guidelines towards best-practice risk management, we believe that a number of additional risk issues deserve further examination,” the report adds.

“This view stems from Islamic financial institution’s relatively short track record - modern Islamic banking has been in existence for only three decades and many sukuk products are less than a decade old - and the fact that most Islamic banks are active in the developing world where transparency, corporate governance and risk management at large are still works in progress.

“The other problem it identifies is the shortage of skilled risk management professionals familiar enough with the Sharia-compliant banking universe.”

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By Aaron MacLean
From the March/April 2007 Issue of “The American”

Muslim scholars say the Qur’an prohibits collecting interest on loans. But many banks, both global and local, have found clever ways to meet religious strictures. It’s a system that may be hypocritical, but also profitable.

The coverage can be a little bit breathless: “La finance Islamique en plein boom,” Le Figaro reported in September. Yes, Islamic banking, structured along the lines that religion decrees, is in full boom. But is it really banking? And is it really kosher?

(more…)

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Reprinted from BBC Online:

The UK’s first Islamic Child Trust Fund(CTF) has been launched.

There are now a range of products - including current accounts, mortgages and even personal loans - which comply with Sharia Islamic law.

BBC News examines Islamic finance and how it works.

(more…)

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The concept of takaful, or Islamic insurance, where resources are pooled to help the needy does not contradict Shariah. The concept is in line with the principles of compensation and shared responsibilities among the community. It is not a new concept, in fact it had been practised by the Muhajrin of Mecca and the Ansar of Medina following the hijra of the Prophet over 1400 years ago. It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shariah.

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It is a Muslim’s belief that any misfortune that befalls him, that results in the loss of life or belongings, is by the will of the Almighty Allah. At the same time, we are also taught to take positive steps to avoid or reduce the possibility of these misfortunes as indicated by the hadith:

“The Prophet (s.a.w.) told a Bedouin who left his camel untied to the will of Allah: Tie your camel first, then put your trust in Allah”

(Narrated by at-Tirmizi and Ibn Majah)

Nowadays, insurance is seen as a means of action undertaken to reduce the risk of loss due to misfortunes. An alternative form of cover a Muslim can avail himself against the consequences of catastrophe and disaster is by participating in Takaful schemes. It is a scheme based on solidarity, shared responsibility and brotherhood among members. Participants of this scheme all agree to mutually help each other by contributing financially on the basis of tabarru’ (donation).

(more…)

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Are you confused by the Arabic terms used in Islamic banking and finance? Unfamiliar with the various types of financial products offered? This glossary of Islamic banking concepts may help:

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