Banking On Sharia

Edward, an expatriate from Italy, wants to make sure his investment will not go to waste. Last year, he made a 30 per cent down payment on a commercial property at the Business Bay area in Dubai.

Considering the current economic climate, he thought that rather than paying out the balance himself, it would be better to get some financial help from a lender.

"There's no firm assurance that the developer will be there down the line, so I thought the best thing to do would be to get a mortgage," he says.

To keep his investment secure, the expatriate, who refers to himself as a Buddhist, signed up to a Sharia-compliant mortgage.

Sharia prohibits charging interest on loans. It denounces investing in businesses involved with gambling, alcohol, tobacco and pornography.

Given these restrictions, the Islamic bank buys the property and leases it out to the customer for a specified time. At the end of the lease period, the property is transferred to the customer's name. This way, the bank avoids charging the customer an interest on the loan.

"Charging interest on a loan is not allowed under Sharia. Instead, the way that some banks provide financing to satisfy the needs of customers, is by buying the asset which the customer needs and either selling or renting it to the customer. In this case, the property being purchased is rented to the customer for his use," explains Abdul Fattah Sharaf, chief executive officer of personal financial services at HSBC Middle East and North Africa.

But one of the things that appeal to Edward is the idea that Islamic mortgages are founded on religious beliefs, so he feels there is less risk involved.

"I'm comfortable because it's linked to religion. It's not a man or a machine that's there to make money from me. You get that sort of feeling that someone up there is helping you out - which is weird but there's less chance of being ripped off," he explains.

Besides, the Italian expat says, it also appeals to him that there are stunning parallels in how Christians and Muslims deal with the prohibition against usury, or charging interest on money.

He notes that when usury was banned by the Church in ancient times, the Medicis, the famous Italian family who made a fortune from banking, managed to get around it through acts of charity. They built and repaired churches, and made money by selling holographic bills of exchange.

Since, like many non-Muslims, Edward is not privy to the ins and outs of a Sharia mortgage, he sought some advice from several people before making his decision.

"I spoke to a lawyer about it. I was told that it doesn't really matter who you go to since the law is the same and the rates are pretty much the same," he recalls.

Just a few weeks ago, Edward went to Dubai Islamic Bank to apply for a Sharia mortgage. The bank happens to be the holder of the escrow account of Edward's developer. "This is also why I think it seems less risky. Besides, this particular developer is actually building [the property], so the payment plan is linked to the completion of the project," Edward explains.

Edward managed to get his application pre-approved by the bank in three to four days' time, but the paperwork that came along with it proved to be a challenge.

He had to sign several documents and issue a number of cheques to complete the financing process. "A pain is the back office operations. If a cheque is not perfect from their perspective, they send it back and ask for a new one. I had to go through three alterations," he says.

Prior to the pre-approval, he submitted six months' worth of bank statements and a letter from his employer, and paid a processing fee equivalent to 1.25 per cent of the finance amount. He also had to check if the property was registered with the Real Estate Regulatory Authority.

After the pre-approval, a valuation fee worth Dh2,500 was collected. He was required to submit copies of the property's sale and purchase agreement, floor plan, payment schedule, receipts for the amount paid to the developer and latest statement of account from the developer, stating the amount received. Edward was also made to open an account with the mortgage bank.

A few days later, the bank prepared a final offer letter which Edward signed, along with the mortgage registration document. Since Edward's property is still under construction, the deal he signed up to is called "forward Ijarah" or forward-dated lease.

Under this type of contract, the financier agrees to buy the property or take over the developer's payment schedule and lease it out to the customer at a future date. All payments will be made directly to the developer over the construction period.

Once the construction is complete, the deal works exactly like an Ijarah contract, whereby the property's ownership can be transferred to the customer at the end or maturity of the lease period.

From Gulf News