Islamic Finance Eases Scots' Home Crisis

"I would be happy to sit down and talk to them about their ideas," says Minister Neil.
The government in Scotland is contemplating an innovative scheme on using Shari`ah-compliant investments to address the housing dilemmas Scots are facing in the ongoing severe recession.

"I would be happy to sit down and talk to them about their ideas," Housing Minister Alex Neil told the Sunday Times on July 12.

Officials from the Islamic Finance Council (IFC), a Scotland-based body representing Islamic financial interests worldwide, will discuss with Neil how Islamic finance could be used to help plug the funding gap for new social housing in the European country.

Under an IFC plan, Shari`ah-compliant finance can fund new shared-ownership homes with backing from the government.

But unlike those with conventional mortgages, householders would be largely insulated from negative equity.

If the occupier had a 10% stake in a property worth £200,000 that later fell in value to £150,000 and wanted to sell, the financier with a 90% stake would not be able to recover the £180,000 they had put in initially.

Instead, they would have to settle for 90% of the sale price, recovering only £135,000, and the householder would avoid having to cover the £45,000 shortfall.

As for Islamic financiers, if and when property prices rise, they could qualify for a higher share of the profits when homes are sold, gaining not only 90% of the final value but an extra bonus from the proceeds.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

Islam forbids Muslims from usury, receiving or paying interest on loans.

Transactions by Islamic banks must be backed by real assets -- not shady repackaged subprime mortgages.

Attractive

IFC officials believe the scheme would be the answer to housing problems in Scotland as it would lead to a rise in the availability of affordable homes.

"The ability to avoid negative equity is a very powerful message that would resonate for many in the middle classes who can’t afford to be stuck in such an awkward situation," Omar Shaikh, of the IFC, told The Times.

Islamic finance partnership would also save the Scottish government millions of pounds at a time when its budget is under unprecedented pressure because of the recession.

Shaikh affirms that Islamic finance products provide a wide range of investment opportunities that would prove attractive to ethical investors.

"It could also be a very attractive product in the current climate for people of all faiths and none."

He asserted that the Islamic finance industry, globally, has become "very energetic" recently as it keeps growing at a rapid pace.

"There is absolutely an appetite for this."

Islamic finance is one of the fastest growing sectors in the global financial industry.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.