Islamic home financing in Australia
In response to articles on this website about the availability of Islamic mortgages in the UK and other places, a reader named Houssam posted the following comment:
“Its good to know that these type of loans exist but what about the Muslim community in other countries like Australia. Are we able to borrow money from a different country? please reply as i am in a desperate situation to borrow for the purchase of a home for my family.”
I did a little research and found an article on the International Business Times titled, “Demystifying Muslim Mortgages”. It indicates that lending organizations offering Islamic home financing do indeed exist in Australia.
One is called the Muslim Community Cooperative of Australia (MCCA). Their website is http://www.mcca.com.au/
Another is Iskan Home Finance, based in Sydney. Their website is http://www.iskan.com.au/home.htm
So, Houssam, take hope! As a Muslim in Australia you have alternatives to buy a home and still adhere to your religious principles.
I am reprinting the article in full here:
Demystifying Muslim Mortgages
27 November 2009 @ 12:00 am AEST
Some Muslims won’t accept the standard loans offered in Australia based on Islamic law forbidding interest payments. They’ve instead taken on a new way of lending aimed to stay within their beliefs. This unique Islamic finance market is growing internationally to the tune of nearly US$1 trillion, and could soon become a force in Australia as well. Kit Kadlec reports.
“Those who charge riba are in the same position as those controlled by the devil’s influence… As for those who persist in riba, they incur Hell, wherein they abide forever” – Qur’an 2:275
This much is clear – the Qur’an has very strong words against “riba,” which loosely translates to interest.
This poses a clear difficulty for Muslims in Australia who would want to take out a mortgage while still following Islamic law. There were more than 340,000 Muslims in Australia in 2006, and the population is growing. Many of these residents want to live the Australian dream and own their own home. But in doing so with a local lender, they must pay back interest and thus violate “Sharia” or Islamic law.
“The difference between Islamic and Western banking is the notion of interest rates,” says Nail Aykan, marketing manager with the Muslim Community Cooperative of Australia (MCCA). “In the Islamic beliefs, the interest rate is forbidden, hence there must be an alternative.”
One way to avoid any interest payments would be to pay entirely in cash for a property, but few could ever afford such a transaction in Australia. Another option would be to borrow from friends, but that also is usually not practical.
In order to get around this challenge, the MCCA has followed the lead of other lenders abroad and offered Islamic finance – essentially a process that avoids interest by entering into a partnership with each homebuyer and sharing the risk of the purchase.
The buyers don’t make interest payments, but instead pay rent to the MCCA until a certain point when they are granted full ownership.
Slow start in Australia
Founded in 1989, MCCA is the first and one of the leading providers of Islamic finance in Australia, a small but growing market. There’s little competition other than a few others such as Sydney-based Iskan Home Finance. While Islamic finance has taken off in some Western countries such as Britain and the United States, it’s still relatively small here. Aykan says there are about 1,500 MCCA members, which is slightly under 2% of the estimated 80,000 Muslim families across the country.
Part of the problem in drawing in customers is that the MCCA does not offer the multitude of services as larger banks do.
“If we had real banking services, I believe we could easily penetrate 20% of the Muslim market,” says Aykan, going as far as to say 50% of the Muslim market eventually be committed to Islamic finance eventually in Australia. The MCCA also aims to reach non-Muslim customers as well.
While the Muslim community is growing, it is not completely accurate to describe it as one homogenous group. There are more than 60 countries of birthplace and 55 languages spoken, according to the MCCA.
Another major reason Australia has lagged in growth of its Islamic finance sector is that it doesn’t have the connections to the Arab world like the U.S. and U.K., says Bala Shanmugam, a professor and chairman of accounting and finance at Monash University’s Malaysian campus.
“Britain and the United States have always viewed themselves as a major destination for petro dollars – a repository for Arab funds,” says Shanmugam. “Hence they are taking steps to do what is necessary to maintain their stand. Australia on the other hand is not exactly a centre for such funds, so I do not see a rapid take-off in that direction.”
Perhaps the largest issue, however, is the fact many Australian Muslims, while growing in number, see the traditional lending method with banks here to be both easier and cheaper.
“Research shows that Muslims as well as non-Muslims view returns as a more important factor in a financial transaction,” says Shanmugam. “This variable outweighs religion in terms of importance for patronising types of banking. Therefore, unless people see actual benefits in terms of returns, the extent of patronisation will be nominal.”
There are some Muslims in Australia who place religion first, however. Mohammad Tabiaat, of Lebanese descent, is one who chose to borrow through MCCA for his first family home.
He bought a three bedroom home in Campbellfield, outside of Melbourne, in December for $270,000, paying a 20% deposit. That part is not unlike anything other Australians would do in purchasing such a home.
The difference is that Tabiaat is not paying interest back. Instead, he’s paying about $1,600 per week in rent through “Murabaha.” It can be described as a lease-to-own agreement, where the borrower is offered a fair market rent.
Murabaha, an Islamic term, is defined as a transaction where the seller (in this case MCCA) discloses the cost of its commodity, then adds some profit thereon, which is either a lump sum or based on a percentage. This payment must be a fixed amount.
In another option, Ijarah Muntahia Bittamleek, the payments can be either fixed or variable, and the end ownership of the property is transferred to the client with the last instalment. There are another three products as well, and other lenders such as Iskan Home Finance have other offers as well, although all aim to be Sharia compliant.
In his own particular case, Tabiaat will be paying back his rent for 180 weeks, which ultimately equates to $288,000, plus the $54,000 deposit. While not everyone can afford such high weekly rents of $1,600, it is common to have borrowers pay off the amount owed quickly with Islamic finance, says Aykan.
The MCCA has also taken on some of the risk in this transaction, as it essentially has made the purchase on behalf of Tabiaat. According to the MCCA, the mortgage can either be seized by the funder or left with the borrower given that it is registered for full mortgage securities entitlement to the funder. It is also permissible to use a third party property as a security mortgage.
Tabiaat says he realises it would have perhaps been easier to use a traditional bank, but he prefers to follow the Islamic law.
“It’s an individual choice,” he says. “Some people are really conscious about what rate they are paying, whereas others don’t mind paying the extra amount to do it in a compliant way.”
How much more is it that one must pay in Islamic finance? Aykan says it often is a very similar bottom line.
“A normal bank and a traditional bank may be offering the same rates, but it’s how it’s processed that is the difference,” he says.