Islamic mortgages for all faiths

Published on Friday 1 May 2009 21:33

THE need to return to traditional banking values is a debate that has been well and truly reignited by the economic crisis.

Ethics and responsible lending are high on the agenda as we come to terms with the fallout from the crises that have hit some of the world's leading banks. It is therefore not surprising that attention is turning increasingly to Islamic finance as a stable alternative.

While "toxic" debts have swamped conventional banks across the world, Sharia'a compliant financial products have continued to expand. Islamic institutions have avoided massive writedowns in their assets because they carried no exposure to complex financial instruments or derivatives.

Following its ethical principles, all financial transactions within an Islamic finance system must be connected to a tangible asset. Islamic banks use their own funds and will not issue interest-bearing instruments to finance loans; they avoid transactions which are essentially speculative and trading in unowned assets (such as short selling) is prohibited.

But it would be a mistake to think that Islamic finance is only for the Muslim community. It is open to all faiths and Scotland's new Islamic mortgage could, for instance, provide a novel stimulus to support Scotland's property market.

The Islamic Bank of Britain (IBB) has just launched its home purchase plan in Scotland. Its combination of competitive pricing and ethical values should resonate in the Muslim community and beyond.

The key difference between an Islamic mortgage and a conventional home loan is that the Islamic product is based on shared interests in the ultimate purpose of the finance, namely the property. It is not a purely financial arrangement.

Under an Islamic structure, both the customer and the bank contribute towards the purchase of the home and both acquire interests in it.

Over the course of the plan, the customer will make monthly purchase instalments through which they will buy out the bank's share. With each instalment paid, the bank's share in the property diminishes.

The latest mortgage figures show that the number of home loans across the UK is now rising, albeit very slowly. In this market, an Islamic mortgage could have a significant role to play by offering Scottish Muslims and non-Muslims alike greater choice.

IBB's move into Scotland gives Scotland an opportunity to become a hub for the development and expansion of Islamic finance. The flexibility and strength of Scots law, along with our heritage of innovation (not least in ethical finance), can provide the basis for creating a new range of financial products.

• Graham Burnside is a partner of Tods Murray and head of its banking and finance department.