Midweek Money: Borrow in good faith - Arts and Entertainment - The Independent

Midweek Money: Borrow in good faith

A new scheme offers Muslims mortgage loans that don't break Islamic Law.

Millions of mortgage borrowers tend to take for granted the likely availability of a home loan package that meets their needs. Yet UK lenders have signally failed to deliver suitable products to one section of society.

For many years, more than 1.5 million Muslims living in the UK have had to compromise their beliefs to buy a house. The payment or receipt of interest is not legal in Islam. It is forbidden in the Koran, and that removes the possibility of taking out a mortgage with high street lenders and complying with Islamic Law.

Although attempts have been made by the Islamic Investment Banking Unit (IIBU), a division of The United Bank of Kuwait, to respond to this need by launching a Muslim mortgage in the UK, until recently aspects of it had fallen foul of Islamic Law.

The Murabaha Plan, launched in 1997, works on the basis of trading, or buying and selling goods, at a profit. The bank buys the house for the client and then sells it on to him for a higher price. This plan can be used by Muslims to buy a house, but not to re-mortgage. This is because under Islamic Law, or Sharia'a, it is unacceptable for a bank to buy the house from its owner and sell it back at a higher price.

So at the start of the year, IIBU launched a re-mortgage product, the Ijara Plan, which enables Muslims to get out of an interest-paying mortgage contract with a high street lender. With this re-mortgage plan, the bank buys the house from the owner, pays off the mortgage with the original lender, and then "rents" the property back to the client.

Keith Leach, financial services manager at the Islamic Investment Banking Unit, says: "Part of that rent gives us our profit and covers our costs, and at the same time they get to buy the house from us for a deferred period, say 25 years."

The Ijara plan will have the pricing of its "rent" altered every year, so economically it will be equivalent to a variable interest rate mortgage, according to Mr Leach. He adds: "The numbers might equal the same as interest, but technically, legally, and structurally, they are not paying us interest."

For both plans, the client has to pay 20 per cent of the value of the property as a down-payment. This is a large amount in comparison to the high street lenders, but as an Islamic company, the IIBU does not want to "encourage people to take on excessive financial commitments", and so spurns insurance products. Consequently, it takes a more cautious approach to the amount of finance that is available to individuals.

Another drawback for both home-buying plans is that the customer is not eligible for mortgage interest tax relief (Miras), as he is not paying the bank interest. However, this now amounts to barely pounds 20 a month and the signs are that the Government plans to reduce Miras further.

One problem with the original Murabaha Plan is that the repayment term is only 15 years, making it too expensive for many people. The Ijara plan can offer payment terms over 25 years.

The IIBU already has 80 clients for the Murabaha Plan, with approximately another 20 applications currently being processed, and has already received its first applications for the Ijara plan. The IIBU believes that these are the only mortgage products on the market to comply with Islamic law, but they are not the first to be offered in the UK.

The Bank of Credit Commerce International (BCCI), which was particularly popular with the Asian community, did offer a Muslim mortgage before it was famously closed down by the Bank of England in 1991.

Albaraka International Bank, the British division of a Saudi Arabian finance institution, also offered Muslim mortgages, but voluntarily surrendered its banking licence and re-paid all its depositors in 1993.

After the BCCI shutdown, Muslims had good reason to mistrust the banks, and that mistrust is thought to have contributed to the slow initial take- up rate of the Murabaha plan, but it has started to improve. Mr Leach says: "We have spent a fair amount of time trying to get our positioning and imaging right, and [to get] people to trust us, to know that we are not in it for the short term."

This long-term commitment is underlined by the fact that IIBU is to launch itself as a separate company from The United Bank of Kuwait in the summer. It will then be known as Al Manzil Islamic Financial Services, and hopes to offer a range of Islamic finance products to parallel what is available from high street banks. Its products will be marketed through independent financial advisers, and it is organising seminars to brief them.

But opinions on the eventual popularity of these products vary. Syed Junaid Ahmad, senior partner at Unicorn Independent Financial Advisers, does not believe that the take-up rate will be very high. "About 90 per cent of the Muslims have succumbed to the idea that [paying interest] is something that they will just have to live with, and God will forgive them for taking a mortgage where they are paying interest. So they will stick it out."

But IIBU may soon have some competition. Another company that hopes to launch a Muslim mortgage is a Geneva-based Islamic financial services company called Dar al-Maal al-Islami Trust. It hopes to launch a Muslim mortgage through one of its subsidiaries, which will be marketed in Britain through its UK arm, Takafol UK. It currently offers an Islamic saving and investment plan, with some life assurance, and it has submitted plans for a Muslim mortgage to its Sharia'a board.

Mohammed Aslam, general manager, Takafol UK says: "[The Sharia'a board] are still considering it. We haven't developed an Islamic mortgage itself, but we hope to do mortgages eventually. We want to expand and to have more products that the Islamic market demands."

Alison Steed is assistant features editor at `Financial Adviser'.

`The Independent' has published a 36-page `Guide to Mortgages' on almost every aspect of home loans. For your free copy, sponsored by First Active, the flexible mortgage company, call 0800 550551

Arts and Entertainment
Robin Thicke's video for 'Blurred Lines' has been criticised for condoning rape

Robin Thicke admits he didn't write 'Blurred Lines'

music
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'

film
Arts and Entertainment
Matt Damon as Jason Bourne in The Bourne Ultimatum (2007)

film
Arts and Entertainment
Sheridan Smith as Cilla Black

Review: Cilla, ITV TV
Arts and Entertainment

TV
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
Keira Knightley and Benedict Cumberbatch star in the Alan Turing biopic The Imitation Game

film
Arts and Entertainment
Kanye West is on his 'Yeezus' tour at the moment

Music
Arts and Entertainment
Rob James-Collier, who plays under-butler Thomas Barrow, admitted to suffering sleepless nights over the Series 5 script

TV
Arts and Entertainment
Bradley Cooper and Jennifer Lawrence star in new film 'Serena'

film
Arts and Entertainment
Some might argue that a fleeting moment in the actor’s scintillating, silver-tongued company is worth every penny.

TV
Arts and Entertainment
Colin Firth stars as master magician Stanley Crawford in Woody Allen's 'Magic in the Moonlight'

film
Arts and Entertainment
U2 have released Songs of Innocence in partnership with Apple

musicBand have offered new record for free on iTunes
Arts and Entertainment
Brad Pitt stars in David Ayer's World War II drama Fury

film
Arts and Entertainment
Top hat: Pharrell Williams

music
Arts and Entertainment
Jonah Hill and Channing Tatum star as undercover cops in 22 Jump Street

film
Arts and Entertainment
David Bowie is back with fresh music after last year's hit album The Next Day

music
Arts and Entertainment
Keith Richards is publishing 'Gus and Me: The Story of My Granddad and My First Guitar', a children's book about his introduction to music

music
Arts and Entertainment
Calvin Harris has generated £4m in royalties from the music platform

music
Arts and Entertainment
Jenna Coleman stars as the Time Lord's companion Clara in Doctor Who

TV
Arts and Entertainment
Time and time again: the popular daytime quiz has been a fixture on Channel 4 since 1982

TV
Arts and Entertainment

To mark Tolstoy's 186th birthday

books
Arts and Entertainment
Rachel McAdams is reportedly competing with Mad Men's Elisabeth Moss for a major role in True Detective

TV
Arts and Entertainment
Sam Smith returned to the top spot with his album 'In The Lonely Hour'

music
Arts and Entertainment
Steve Backshall is set to dance with Ola Jordan on Strictly Come Dancing. 'I have a friend who's a dancer and she said to me 'You want Ola because she's a fantastic dancer and she can make anyone look good' meaning 'even you'!' he said.

TV
Arts and Entertainment
Sting and Paul Simon on stage together at Carnegie Hall in New York

music
Have you tried new the Independent Digital Edition apps?

ES Rentals

    Independent Dating
    and  

    By clicking 'Search' you
    are agreeing to our
    Terms of Use.

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week