The growth of “halal mortgages” over the past 20 years has increased access to home ownership finance for many Muslims. Halal mortgages offer interest-free loans in accordance with Islamic beliefs.
These mortgages are available in over 80 countries with large Muslim populations, such as Saudi Arabia, Iran, Malaysia, the United Arab Emirates, Kuwait, Qatar, Turkey, Bahrain, Indonesia, and Pakistan, where they form the majority of the population. the $3.9 trillion global Islamic finance economy.
Access to halal mortgages has increased in the United States. Until 1997, no financial institution was willing to offer halal mortgages, but by 2024, more than 25 banks have made them available.
I The conversation asked Shariq Siddiqui, assistant professor and director of the Muslim Philanthropy Initiative at Indiana University, to explain halal loans.
What are halal bills?
Halal mortgages are an Islamic financial instrument and provide an equitable way to acquire home ownership. They emphasize risk sharing and cooperation with the aim of checking unfair exploitation and accumulation of wealth in the hands of the few. In such a system, money is a medium of exchange rather than a profit-making commodity.
What are the religious roots of Islamic finance?
The holy book of Islam, the Quran, and the words of the Prophet Muhammad, the Sunnah, prohibit riba, (interest), maisir (speculation) and gharar (uncertainty or unequal risk).
For example, the Quran says, “O you who believe, do not eat the amount of money earned on ribā (interest), doubled and multiplied. Fear Allah, so that you may succeed.”
Over time, Muslims have sought to develop systems that conform to these laws. These include bonds that do not earn interest but are based on profit sharing; socially responsible funds that adhere to ethical rules; and insurance that provides protection through the public fund.
However, since World War II, monetary policies in the world financial market have been largely based on profit.
How does Islamic finance work in today’s environment?
In today’s context, Muslims apply contract law to economic activity and provide interest-free mortgages. For example, as a lawyer, I can develop real estate contracts that allow buyers and sellers to transact without interest. This “collateral” contract will be recorded with the county.
Traditionally, there are three types of halal mortgages. In the first, known as ijara, the bank buys the property and leases it to the home owner; the landlord pays the rent, principal payments and bank charges; the buyer’s share of the home remains the same until the entire loan is paid off.
Musharaka reduction is another type of joint ownership arrangement between the bank and the buyer. The buyer makes monthly principal payments and pays bank charges rather than interest. With each principal payment, the buyer’s ownership increases and the bank’s ownership decreases.
In the third type, murabaha, the bank buys the house and immediately resells it to the buyer at a higher price – called a profit. The buyer usually pays a 20% down payment. After that, the buyer makes fixed interest-free payments until the loan is paid off.
What is the availability of halal mortgages in the US?
In 2001 and 2003, respectively, Freddie Mac and Fannie Mae began buying Islamic mortgage products to provide additional capital to the US Islamic financial market. These government-supported housing agencies operate under the conservatorship of the Federal Housing Finance Agency and are one of the main ways to strengthen home ownership in the United States.
These mortgage buyers have grown to become major investors in Islamic mortgages. For example, Freddie Mac invested in Guidance Residential, one of the largest halal mortgage companies in the US.
What are the benefits?
These programs ensure that there is no risk between the bank and the home buyer. For example, if a buyer can’t keep up with payments, their principal payments are protected and not charged interest. In addition, if the home loses value, both the buyer and the bank lose equally in the principal value of the home.
They require greater transparency in costs, fees and obligations; both parties need to cooperate and fulfill their obligations.
This reduces the risk of defaults such as the subprime mortgage crisis, where banks overpriced homes and mortgages that consumers could not afford, which led to the 2008 global recession.
What are the negative aspects?
Halal loans are very expensive and difficult to get into, as they require a down payment of at least 20%. In addition, they are not available in all states of the United States.
Additionally, many Muslims are not willing to deposit their money in banks, if those banks are required to pay interest or receive a portion of their profits based on interest.
Shariq Siddiqui is an assistant professor and director of the Muslim Philanthropy Initiative at Indiana University..
This article has been republished from The conversation under a Creative Commons license. Read the first article.
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