Sunday, March 16, 2008

Danish banks offering sharia-compliant loans

I've often wondered how one mortgage can be compliant with Islamic law and another not. After all, there's no incentive for a lender to loan money to a borrower without getting more money back than what is loaned. Money, after all, costs money. So I read with some interest this article in Denmark's Jyllands-Posten which gave a rough description of how the loans work.
What makes this loan different from an ordinary loan is that Amanah [the 'lending' company] buys the property that the customer is interested in and then sells it to the customer with a conditional deed, so that the buyer can use the property but will only own it outright after the last mortgage payment is made, typically after 30 years.

This model is based on the Sharia-approved Islamic financing system, which involves 'Musharaka' (partnership), 'Ijara' (rent) and future ownership, 'Tamalluk'. The property buyer does not pay interest on the loan and therefore does not create debt.
So it seems that the problem with conventional lending as we in the west know it is the creation of debt. But how does this sharia-compliant loan not create debt? If the borrower must "rent" the property for a period of 30 years, has he not taken on a debt equal to the yearly rent times 30? I don't believe for a moment that there isn't a clause in the "lease" providing for stiff and substantial penalties if the "renter" terminates the "lease" before 30 years are up.

If the issue is the interest on the loan, then this amounts to nothing more than pulling a fast one on Allah by paying someone else to pay the interest on behalf of the borrower.

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