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
books
Arts and Entertainment
The Doctor and the Dalek meet
tvReview: Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
Arts and Entertainment
Star turns: Montacute House
tv
Arts and Entertainment
Iain reacts to his GBBO disaster

TV
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
Simon Cowell is less than impressed with the Strictly/X Factor scheduling clash

TV
Arts and Entertainment
Gothic revival: artist Dave McKean’s poster for Terror and Wonder: The Gothic Imagination
Exhibition
Arts and Entertainment
Diana Beard has left the Great British Bake Off 2014

TV
Arts and Entertainment
Lisa Kudrow, Courtney Cox and Jennifer Anniston reunite for a mini Friends sketch on Jimmy Kimmel Live

TV
Arts and Entertainment
TVDessert week was full of the usual dramas as 'bingate' ensued
Arts and Entertainment
Clara and the twelfth Doctor embark on their first adventure together
TVThe regulator received six complaints on Saturday night
Arts and Entertainment
Vinyl demand: a factory making the old-style discs
musicManufacturers are struggling to keep up with the resurgence in vinyl
Arts and Entertainment
David Baddiel concedes his show takes its inspiration from the hit US series 'Modern Family'
comedyNew comedy festival out to show that there’s more to Jewish humour than rabbi jokes
Arts and Entertainment
Puff Daddy: One Direction may actually be able to use the outrage to boost their credibility

music
Arts and Entertainment
Suha Arraf’s film ‘Villa Touma’ (left) is set in Ramallah and all the actresses are Palestinian

film
Arts and Entertainment
Madame Vastra and Jenny Flint kiss in Doctor Who episode 'Deep Breath'

TV
Arts and Entertainment
Steve Carell in the poster for new film 'Foxcatcher'
filmExclusive: First look at comic actor in first major serious role
Arts and Entertainment

TV
Arts and Entertainment
Kingston Road in Stockton is being filmed for the second series of Benefits Street
arts + entsFilming for Channel 4 has begun despite local complaints
Arts and Entertainment
Led Zeppelin

music
Arts and Entertainment
Radio presenter Scott Mills will be hitting the Strictly Come Dancing ballroom
TV
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
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.

    The other Mugabe who is lining up for the Zimbabwean presidency

    The other Mugabe who is lining up for the Zimbabwean presidency

    Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
    The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

    The model for a gadget launch

    Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
    Alice Roberts: She's done pretty well, for a boffin without a beard

    She's done pretty well, for a boffin without a beard

    Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
    Get well soon, Joan Rivers - an inspiration, whether she likes it or not

    Get well soon, Joan Rivers

    She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
    Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

    A fresh take on an old foe

    Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
    Fashion walks away from the celebrity runway show

    Fashion walks away from the celebrity runway show

    As the collections start, fashion editor Alexander Fury finds video and the internet are proving more attractive
    Meet the stars of TV's Wolf Hall... and it's not the cast of the Tudor trilogy

    Meet the stars of TV's Wolf Hall...

    ... and it's not the cast of the Tudor trilogy
    Weekend at the Asylum: Europe's biggest steampunk convention heads to Lincoln

    Europe's biggest steampunk convention

    Jake Wallis Simons discovers how Victorian ray guns and the martial art of biscuit dunking are precisely what the 21st century needs
    Don't swallow the tripe – a user's guide to weasel words

    Don't swallow the tripe – a user's guide to weasel words

    Lying is dangerous and unnecessary. A new book explains the strategies needed to avoid it. John Rentoul on the art of 'uncommunication'
    Daddy, who was Richard Attenborough? Was the beloved thespian the last of the cross-generation stars?

    Daddy, who was Richard Attenborough?

    The atomisation of culture means that few of those we regard as stars are universally loved any more, says DJ Taylor
    She's dark, sarcastic, and bashes life in Nowheresville ... so how did Kacey Musgraves become country music's hottest new star?

    Kacey Musgraves: Nashville's hottest new star

    The singer has two Grammys for her first album under her belt and her celebrity fans include Willie Nelson, Ryan Adams and Katy Perry
    American soldier-poet Brian Turner reveals the enduring turmoil that inspired his memoir

    Soldier-poet Brian Turner on his new memoir

    James Kidd meets the prize-winning writer, whose new memoir takes him back to the bloody battles he fought in Iraq
    Aston Villa vs Hull match preview: Villa were not surprised that Ron Vlaar was a World Cup star

    Villa were not surprised that Vlaar was a World Cup star

    Andi Weimann reveals just how good his Dutch teammate really is
    Bill Granger recipes: Our chef ekes out his holiday in Italy with divine, simple salads

    Bill Granger's simple Italian salads

    Our chef presents his own version of Italian dishes, taking in the flavours and produce that inspired him while he was in the country
    The Last Word: Tumbleweed through deserted stands and suites at Wembley

    The Last Word: Tumbleweed through deserted stands and suites at Wembley

    If supporters begin to close bank accounts, switch broadband suppliers or shun satellite sales, their voices will be heard. It’s time for revolution