Islamic Loans Attractive To All

Islamic mortgages are becoming increasingly popular among non-Muslims. Although there is often no clear distinction whether they are a cheaper alternative to traditional property loans, customers choose it because of their ethics.

"We are seeing more and more non-Muslims taking a greater interest in [Islamic] products and services," Abdul Fatah Sharaf, CEO of personal financial services at HSBC Middle East and North Africa, says.

The key differentiator between an Islamic and conventional mortgage is the process which the financing is offered. Since the most distinctive element of Islamic finance is the prohibition of interest - whether nominal or excessive, simple or compound, fixed or floating - the lenders purchase the assets and either sell or rent them out to the customers.

In conventional mortgages, the property buyer borrows the money and pays it back with some interest charged on top. Banks calculate the interest due over the life of the loan. "Many charge interest on an outstanding balance basis, take payments each month and reassess the mortgage payments due once a year," observes Steve Gregory, director of technical services at Holborn Assets.

Ideally, all Sharia-compliant products have the element of transparency in terms of fees, charges and profit, and the rates imposed should not be excessive.

"In Sharia, the charging of interest is not allowed. However, charging of Ujrah or the rent that will be paid by the customer for the usage of the property is allowed," Sharaf says.

The most important feature in Islamic mortgages, Sharaf adds, is that if the customer wants to settle the mortgage early, the bank is not allowed to charge any closure fees as a percentage of the money lent.

"The main objective in the Islamic finance is to support the customer's financial needs through Sharia-compliant ways. So, if the customer wants to settle the outstanding finance amount, then the bank must not, in principle, charge extra fees or early settlement fees which can sometimes reach up to five per cent of the finance amount. However, the bank is allowed to charge minimal fixed fees to cover the operational cost," Sharaf explains.

As far as risks are concerned, Islamic mortgages seem to work in favour of the property buyer. "With traditional mortgages, the customer carries the risk as he owns the property from the outset, along with any losses the property may make," Gregory points out.

"Property values go down as well as up. If an Islamic bank owns the property and the value of the property falls, the bank carries that risk. One hopes the bank has taken due consideration of this and are still able to meet the requirements of regulators in terms of liquidity. Falling property values can harm the bank," he adds.

In terms of monthly payments, however, one cannot say a Sharia mortgage is cheaper than a traditional loan. "Monthly payout is quite similarly priced between HSBC's Islamic and conventional home finance offering," Sharaf explains.

"Monthly payouts tend to be the same as the two products [Islamic and conventional mortgage] are priced similarly. People take out Sharia mortgages because the products are structured according to Sharia laws and they appeal to the customers' beliefs," adds another industry source.