Category Archives: Musharakah and mortgages

Islamic finance could have prevented subprime crisis

Islamic finance could have prevented subprime crisis

The global economic crisis sparked by the US subprime mortgage m

eltdown would not have occurred if Islamic principles were applied in international financial markets, an Islamic scholar said.

Defaults in the US market from risky mortgages have caused major global credit turmoil, as massive US losses led to a squeeze on international credit markets, and subsequent fall in global equity markets.

However, Mohammed Mahmud Awan, a scholar at Malaysia-based International Center for Education in Islamic Finance (INCEIF), said the mortgage crisis was “unthinkable” under Islamic principles regarding debt, Arab News reported on Thursday.

“A crisis such as the mortgage one would technically be unthinkable in the Islamic capital markets sector because it would be against Sharia principles to sell a debt against a debt.”

The subprime mortgage crisis had seen trillions of dollars traded without the backing of assets, he said.

“If such transactions followed the Islamic finance model it would have easily prevented the current economic crisis.”

Speaking at a globalization conference at the University of Bahrain, Awan said the global economic crisis could be stabilised by the use of Islamic finance principles.

“Islamic bonds, carrying unique structure features, cannot fall foul of a crisis such as subprime mortgage crisis. Subprime mortgages are backed by dubiously rated collateralized debt packages which subsequently precipitated a global credit crunch.”

Awan said that it was time for Islamic banking industry to present solutions to the global economic community in the wake of the crisis.

Islamic finance assets are growing at an annual pace of 20% and are set to hit $2 trillion in 2010 from the current $900 billion, fuelled in part by a flood of petrodollars generated by the rise in energy prices.

Islamic finance principles stipulate that deals must be based on tangible assets and require tight controls on debt levels, features analysts say offer some protection to investors and ensure corporate accountability.

However, earlier this month a senior Islamic finance expert warned the sector was in danger because both banks and Sharia scholars were not providing solutions which are Sharia-based.

Abdulazeem Abozaid, member of the Sharia department in UAE-based Emirates Islamic Bank, told banks only aimed to maximise profits.

“They know that there is no real difference between conventional banking and Islamic finance,” Abozaid warned


A Higher Law for Lending: Business is up at Islamic Finance firms in the US

A Higher Law for Lending: Business is up at Islamic Finance firms in the United States

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.

Representatives of the four major Islamic home-finance institutions in the United States said they do not track the reasons customers choose them over conventional mortgage brokers. Several speculated that it was due to the natural growth of what is still a fledgling retail industry, as well as two side effects of the mortgage crisis: The drop in prices in many regions has brought homes back within reach of first-time buyers, who make up a sizable chunk of Islamic financiers’ customers. And the drumbeat of negative publicity about the practices of subprime mortgage lenders has amplified the distrust and discomfort the conventional mortgage industry already inspired in many Muslims.

“Folks have to be questioning the methods used by conventional mortgage companies over the last three or four years based on what’s happening today,” said Hussam A. Qutub, a spokesman for Guidance. “And I think that makes more people think, ‘Well what about the emergence of this [Islamic-] compliant financing industry? Let me give it a look and educate myself about it to see if it could perhaps be more beneficial to me.’ ”

That was the prevailing sentiment among potential customers who approached an advertising booth staffed by Guidance representatives at the annual spring fair held by the All Dulles Area Muslim Society in Sterling on a recent weekend.

Nabila Zerrarka, an Algerian-born woman wearing a white-and-green headscarf and pushing a stroller, wanted to find out if Guidance’s home-finance options were more straightforward than those offered by traditional mortgage brokers.

“Deep down, I don’t feel comfortable paying interest because it is against my beliefs,” said Zerrarka, 29, who is searching for her first home and has already obtained a prequalification letter for a conventional loan from Bank of America. “But I also feel it’s against my financial interests to pay interest. . . . What we’ve seen is that with interest-bearing loans, there are all these gimmicks and hidden costs and tricks that they can surprise you with. . . . If there is a possibility of doing it the Islamic way, we’d like to explore it.”

Mounir Elhaj, 45, a native of Sudan who works at a moving company, wanted to know how Guidance deals with customers who fall behind on their payments. He said he recently helped move a woman whose house was foreclosed on after she missed payments.

“She had been paying her mortgage for 17 years, and the bank still took her house,” Elhaj said to the Guidance sales representative. “So I want to know if I bought a house and then fail to pay, can you help me?”

The representative, Amr Mohamed, smiled magnanimously. “Yes, we can,” he said, adding that Islamic law, known as sharia, forbids businesses from profiting from a customer’s financial hardship. So 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.

Islamic home financing aims to offer Muslim buyers the same opportunities as conventional lenders but with a twist that gets around sharia’s prohibition against the payment of riba. Generally defined as excessive gain, riba has over the years come to be considered the equivalent of making money by renting money — in other words, charging interest — because the borrower shoulders risk while the lender is guaranteed a return.

In one of the alternative arrangements offered by Islamic finance companies, the company buys the house, then sells it to the home buyer in fixed monthly installments at an agreed-upon marked-up price. The markup rate is kept competitive with the prevailing interest rate on a conventional mortgage. So apart from a few additional transaction costs from the atypical nature of the arrangement, the buyer’s monthly payment is roughly equivalent to what it would be with a conventional mortgage.

A second option is for the financier and the home buyer to enter a lease-to-own contract similar to those used to buy cars. Once again, the rental portion of the monthly payment is kept equivalent to prevailing interest payments. The third model, which is favored by Guidance, is also based on a lease-to-own arrangement, except that the buyer and the finance company form a limited-liability entity to own shares of the property.

All three arrangements 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 — a tiny fraction of the corporation’s $1.77 trillion business but nonetheless a slight increase over previous years, according to spokesman Brad German.

While Islamic finance companies have convened boards of prominent scholars to certify that their finance arrangements comply with sharia, not all Muslim thinkers are convinced that they are necessary.

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.

But Hirsi Dirir, a Somali-born technology analyst who recently obtained financing from Lariba to buy a townhouse in Annandale, said such objections pale in comparison with the peace of mind he has gained from making the extra effort to adhere to his faith.

“I wish I could avoid everything that Islam doesn’t allow, but I can’t,” said Dirir, 32. “So if I have the opportunity and the choice to avoid interest, then it’s very important to me not to mess with it.”

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, also 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.”

Sheikh Nizam Yaquby answers common questions relating to Shariah-compliant halal mortgages

Sheikh Nizam Yaquby answers common questions relating to Shariah-compliant halal mortgages

To what extent do contemporary Islamic mortgages comply with Shariah Law:

How important is it for Muslims that their money comes from permissible (halal) sources:

Do Sharia mortgages really address the ethical concerns of Muslims about what is happening to their money:

Will Islamic mortgages lead to greater social inclusion:

U.S. Islamic finance market underserved

U.S. Islamic finance market underserved

Ask about Islamic finance in the United States and the answer, even from a government regulator, is often another question: “Do you mean terror financing?”

Far from it.

Indeed, for what was once a main destination for devout Muslims around the world looking to invest using Islamic law as a guideline, the United States appears to have lost out to Europe, especially the United Kingdom, and Asia.

Many foreigners from the Middle East have been reluctant to bring their investments to U.S. financial markets after the Sept 11, 2001 attacks, as they fear their money might be miscontrued as linked to the activities of Islamic radicals.

That concern was compounded by the national security fears raised by U.S. politicians in 2006 after the United Arab Emirates’ company, Dubai Ports World, bought major U.S. port facilities, and were forced to sell them to an American firm to quell the uproar.

“The common perception is that the U.S. is anti-Islamic finance, anti-Muslim, anti-Arab,” said Isam Salah, head of the Islamic finance practice at the New York law firm King & Spalding.

“People in our shop sit around and think that is wrong. The Federal Reserve has had study groups (on Islamic finance) looking at it and is open to receiving applications. But they don’t have their marketing hats on as much as the UK does,” Salah said.

In 1997 and again in 1999, the Office of the Comptroller of the Currency, one of the regulators of U.S. banks, issued rulings giving permission for financial institutions to sell certain Islamic financial products.

Under sharia law, devout Muslims will not purchase assets that pay interest or earn profits from industries related to alcohol, gambling, or pork processing, among others.

Freddie Mac , the second-largest U.S. provider of home-loan financing, has for years bought Islamic home financing products to help borrowers who do not want to pay interest. Instead they pay a fee to the lender for sharing risk.

“The concept of interest does exist in Islam but it is more akin to the lender sharing the risk along with the borrower. The real prohibition is against both onerous collateral and usury,” said Jean-Marc Oppenheim, professor of Middle East history at Teachers College, Columbia University in New York.

Assets invested according to Islamic guidelines, set out under sharia law, have been growing at 20 percent a year worldwide, reaching $900 billion in 2007, and are set to hit $2 trillion by 2010, accountants Ernst & Young estimated.

“We think a significant portion of the investments, if not a higher dollar volume, was going into the U.S. from 1995 until maybe the early 2000’s,” said King and Spalding’s Salah, who has worked with Islamic finance legal issues for 13 years.


There are an estimated 2.35 million Muslim Americans, of which roughly 1.5 million are adults, a May 2007 study by the Pew Research Center found.

The Pew estimate is not univerally accepted and many believe it is too small a number, but the U.S. Census does not ask about a respondent’s religious affiliation in its national surveys.

The Pew study, titled “Muslims in America: Middle Class and Mostly Mainstream” found that the average incomes of Muslims in the U.S. is higher than in western Europe.

The domestic U.S. Islamic finance industry needs to innovate and try to tap an underserved, generally well educated and affluent Muslim American community.

But choices have been limited, in part because the Muslim population is concentrated in only a few places, and the large number of state banking rules make structuring a nationally-marketed product difficult.

“I am concerned there isn’t enough product. We are seeing on a daily basis money go to Europe, and the UK, Singapore now and the Far East. We have to catch up,” said Naveed Siddiqui, chief executive officer of New York-based Zayan Finance.

“I will tell you, in my conversations with Islamic institutions, they clearly tell me if Islamic finance and the creation of Islamic finance products in the U.S. was motivated and stimulated there would be definite interest in the U.S. markets,” said Siddiqui, who has long experience in the field.

In four months and with little formal marketing, Zayan has built a portfolio of sharia compliant commercial real estate assets with a pipeline of deals worth $250 million, he said.


While the U.S. may welcome Islamic finance, it is still an economy built on conventional financial concepts where the use of interest is ubiquitous. That poses a problem for the handful of domestic fund managers looking to invest along sharia guidelines.

The lack of a globally uniform set of sharia guidelines sometimes also results in differences of opinion among scholars who rule on compliance within sharia law.

“That is why we went to the FIQH Council of North America. They are trying to interpret Islam for North Americans, which may be different than how Saudi Arabians invest. This is allowed,” said Nick Kaiser, president of Saturn Capital and portfolio manager of the Amana funds based in Bellingham, Washington.

“If you are too strict there is really nothing to buy. All American companies deal with interest. There is some interest but the question is, is it their primary business,” he said.

The top-rated $620 million Amana Growth fund, launched in 1984, made Kaiser a pioneer in Islamic mutual funds in America. The fund grew 12.24 percent last year. In 1994 he launched the Amana Income fund ($352 million) which grew 14.12 percent in 2007. Both are top performers as measured by mutual fund tracking firms Lipper and Morningstar.

Year-to-date thru Feb 5, the Amana Growth fund is down 7.48 percent while the Income fund is off 5.7 percent, Kaiser said.

But sharia principles forbade Kaiser from investing in banks and financial institutions, allowing him to avoid the direct impact of the U.S. sub-prime mortgage crisis.

In an ironic twist, it is the uniformity and flexibility of the U.S. financial system that may prove a benefit to Islamic finance when opinion among Islamic scholars is divided.

“Sharia scholars really enjoy working in that framework because they know what the true limitations of creating a product are. It is not a clean slate design,” said Siddiqui.

“Sharia compliance for us is a standard for doing business that we apply in our every day work, but we are not in the business of selling religion,” he added.

UM Financial supports CMHC study on Islamic Mortgages

UM Financial supports CMHC study on Islamic Mortgages

UM Financial has supported Canadian Mortgage and Housing Corporation (CMHC) $65,000 study on Islamic Mortgages and other faith mortgages. Islamically acceptable financing/mortgage is a product/commodity does not come at the expense of others products nor does it compel any Canadian to purchase.

UM is a premier Canadian Islamic finance corporation. The company secured a $120 million facility from Credit Union Central of Ontario in 2004, which is used to finance Shariah compliant real estate residential properties in Canada.

In a letter to Karen Kinsley, CEO of the Canada Mortgage and Housing Corporation, the CEO of UM Financial Omar Kalair said, “Islamic mortgages are equity partnership with payments coming in the form of profits(rental). Islamic finance is structured trade products devoid of usury, similar to ethical products which have filters.”

A similar mortgage model is used by a Manitoba Credit Union serving the Mennonite community which abstains from usury. As people of different faith have options for buying meat when going to a grocery store between Islamic meat (halal), Jewish meat (kosher), organic fed (ethical), etc we as a company offer people who wish to have financing devoid of usury products available to them.”

To the criticism the industry’s proponents respond that the difference is there because Islamic law sees one, even if functionally it’s hard to find it. “It’s like the difference between a wife and a live-in girlfriend,” says David Loundy, vice president of the Chicago-based Devon Bank, a Jewish-owned bank providing Islamic financial products through its branches. “They may serve some of the same functions, but there’s a legal difference between the two, in terms of inheritance and taxes.”

Kalair states “We have over 150 Muslim organizations in Canada who have worked with us in marketing Islamic finance. We have over 100 financial institutions that we have met to discuss Islamic finance products. We have been able to structure Shariah compliant financial products with Credit Union Central of Ontario, Metro Credit Union and McMaster Savings and Credit Union. All our products are within Canadian laws and required no changes in the law as we have communicated our products with Ministry of Finance, OSFI, OSC, FSCO and CMHC. Currently we have serviced close to 500 households however we have a current waiting list of 5,000 households.”

“Other governments have encouraged the development of Islamic Finance with the US Treasury Department appointment of a Scholar in residence for Islamic Finance, establishment of Islamic Finance Project at Harvard University, Dow Jones Islamic Market Indexes and Britain PM Gordon Brown speech at a London Islamic Finance conference wanting to “make Britain the global center for Islamic finance”. Today we have two US banks offering Islamic Financial products in Detroit and Chicago and LloydsTSB offering Islamic Financial products across 2000 branches in Britain.”

“We don’t see Islamic financing ghettoizing the Muslim community. There would be no reason to assume when today we have banks in Detroit and Chicago offer Islamic mortgages at par to the Muslims community through its branches.”

We urge the CMHC to proceed further with their study on Islamic mortgages which will be openly shared for all Canadians to analyze. Islamic mortgages have been operating in Canada for over 25 years.

A copy of the letter was sent to Jim Flaherty, Minister of Finance and Monte Solberg, Minister of Human Resources and Social Development who is responsible for the CMHC.

Islamic finance industry plays key housing role

Islamic finance industry plays key housing role

The increasing and sustained interest in Islamic housing finance and the success of many young and established institutions across the Middle East and North Africa (Mena) region was highlighted during a housing finance forum.

The Mena Housing Finance Forum was organised by the Arab Monetary Fund and the World Bank.

“The Islamic mortgage finance industry is receptive to the changing needs of buyers and the GCC’s evolving market conditions,” said Sakana Holistic Housing Solutions chief executive R Lakshmanan, who was a guest speaker at the event.

“It is clear that in a competitive property market, we have to offer a comprehensive portfolio of flexible Sharia-compliant instruments perfectly suited to today’s dynamic situation and the increasingly financially sophisticated consumer.”

He talked about how Islamic finance instruments can assist buyers across the spectrum of property purchases from ready property, to ones under construction or yet to be constructed, whether it is to be used as a home, business or investment.

It was made clear during the conference that the GCC real estate sector is changing dramatically and rapidly and that financiers must keep abreast of the trends and offer the appropriate services and products.

How Islamic Finance Handles Foreclosures

How Islamic Finance Handles Foreclosures

A prominent condominium conversion in Greenwich, Conn., whose financing is structured to abide by Islamic laws, presents a new test for real-estate investments: How does foreclosure work in such a deal?

That is the question real-estate executives are asking as Lehman Brothers looks to take possession of Greenwich Oaks and Greenwich Place, one of the most-expensive condominium conversions in the country. The complexes were purchased for $223 million in 2006 by Antares Investment Partners, which planned to spend more than $100 million to convert the low-end rental units into high-end condominiums. But the project was plagued by sluggish sales and senior-citizen tenants who refused to move. Lehman Brothers, which lent the developers money to purchase and renovate the complexes, began foreclosure proceedings Dec. 7.

Antares’s principal equity partner in the deal is Arch Street Capital Advisors, which represents a Kuwaiti client that structured a $45 million equity investment in the condos to be “Sharia compliant” or in accordance with Islamic law that forbids interest. Such financial structures have grown rapidly in recent years as money from oil-rich Islamic countries pours into real estate in the U.S. and elsewhere.

Islamic financial investments avoid the use of interest by being structured as leases on the property. Thus, instead of interest, the investor receives rent directly from the property. The amount of the rent is pegged to an amount a traditional investor would have received in interest.

In theory, the foreclosure of a Sharia-compliant investment shouldn’t pose major problems for lenders. The lease that serves as the Sharia-compliant investment vehicle is subordinate to the underlying mortgage. So when a lender forecloses on the mortgage, the lease is canceled.

Doug Callantine, president of Grosvenor Investment Management, which has participated in several Sharia deals on behalf of clients, says that, in theory, Sharia deals are structured so that a lender has the same rights in Sharia investment as in conventional loans, but done under a lease mechanism. He says the Antares deal “will test it and probably improve the process.”Michael McMillen, chairman of the American Bar Association’s Islamic Law Section, says of the 500 or so investments he has seen, he has yet to see a Sharia-compliant investment go into foreclosure. He says dealing with a Sharia-compliant foreclosure shouldn’t be any more complicated than foreclosing on a leveraged lease, such as ones that are used for aircraft, railroads or power plants. “There’s not a lot of magic” in these, he says.

Last Friday, Radco Cos., designated by the project’s lender, Lehman Brothers, issued a notice that it would auction a $62 million controlling piece of the debt known as a mezzanine loan that Antares has failed to repay. Antares also owes Lehman as much as $228 million in a first mortgage on the properties. Antares purchased the two 1960s-era apartment complexes in February 2006. The Islamic finance investment came in the summer of 2006, as the residential market showed signs of softening. Arch Street, representing the Kuwaiti client, put in $45 million, of which $30 million was used by Antares to pay back Lehman for a bridge equity loan.

But by the fall of 2006, it was clear the project was in trouble. Sales were slow and making matters worse, there were more than 100 senior-citizen tenants who under Connecticut law were protected from eviction and refused to leave.

John Freeman, an Antares vice president, says the senior-citizen issue was “one of many factors” and puts most of the blame on the “credit crunch” and the fact that the “condo market has softened.” Mr. Freeman says Antares is still talking with Lehman about restructuring the loan and is hopeful that a deal can be worked out.