Islamic mortgages to grow by 47% a year

United Kingdom: BANKS are scrambling to attract Britain’s Muslims as a new report predicts that the Islamic mortgage market will grow by 47% a year and could be worth £1.4 billion by 2009, writes David Budworth.

Datamonitor, a market research group, said Islamic mortgages would become more competitive as lenders battled for their business.

Until 2003, Ahli United Bank was the only player offering Muslim-compliant mortgages. Since then, United National Bank and Alburaq Home Finance have entered the fray. HSBC, through its Amanah arm, and Lloyds TSB now also offer sharia-compliant home loans.

Maya Imberg at Datamonitor said: “The entrance of HSBC and Lloyds TSB is a milestone in the development of the Islamic-mortgage market. These loans will become increasingly competitive.”

Islamic mortgages generally cost between 1% to 2% more than the cheapest conventional home loans. At present, Lloyds TSB offers the cheapest deal, a two-year discount that charges 5.29%. You need a 10% deposit and pay a £299 arrangement fee on completion.

Conventional mortgages violate sharia, because the Islamic law forbids paying interest. But there are two ways round this.

HSBC and Lloyds TSB avoid charging interest by buying a property outright, renting it to the mortgage-holder, and then handing over legal ownership once the contract ends. This is based on the principle of leasing, or ijara.

Although you do not have the legal title to the property you have all the same rights you would have with a conventional loan. You can sell the property at any time or remortgage to a better deal.

Another method, known as murabaha, involves the bank purchasing the property and selling it to the customer at a fixed mark-up price. The customer then makes regular monthly payments until the purchase price is paid.

At present, murabaha mortgages are regulated by the Financial Services Authority, the City watchdog, but ijara loans are not.

Because the schemes fall outside the rules, unqualified advisers can sell them. If problems arise customers may not be able to complain to the Financial Ombudsman Service and win compensation.

However, the government is intending to bring ijara-based mortgages within the regulatory net in the next year.

The government has also helped by scrapping the double stamp duty that was payable when a bank had to buy a property and then sell it on to its customer.

Source: TimesOnline

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