Islamic finance and buying a home

Brendan Burgess

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I was speaking to a Muslim today who is renting and saving up to buy a house.

The Koran forbids usury and he does not agree with the workarounds via Islamic finance.

He contributes to a pension.

The only way he can buy a house in Ireland is to save up the full price or get a loan at 0% interest.

He has to contribute to a pension to avail of the tax reliefs but that makes home ownership unattainable for him.

I have always maintained that buying your home is a higher priority than starting a pension.

If there were no tax reliefs for either, people would save for a home and pay down their mortgage before saving for retirement.

Should we allow a person's pension fund buy a family home to rent back to the owner free of rent?

It would certainly help the Muslim community.

In the current market, the wall of money would push up house prices.

But as a long-term plan, it would be good long-term financial planning.

Brendan
 
There’s probably a Shariah compliant workaround where a fund buys the property and then there are put and call options for a Muslim person to buy it back at a higher set price which takes account of the notional interest.
 
I thought there was an exception made for a mortgage i.e. that was the only loan allowed. Maybe that’s the workaround you’re referring to that he doesn’t agree with.
 
Peanuts said:
I thought there was an exception made for a mortgage i.e. that was the only loan allowed. Maybe that’s the workaround you’re referring to that he doesn’t agree with.
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Yes, in my experience it’s either the ‘put and call options at a higher price’ or a ‘rent to buy’ scheme where the fund owns the property and the person pays rent that chips away at a higher purchase price.
 
Yes, my friend did not think that the workarounds were Sharia compliant. He wants to comply with the spirit and not just the letter.
 
I was wondering if they could get together and set up their own pension fund vehicle.

This would buy homes and rent them to the contributors.

He would still be renting but would have a friendly landlord.

It would probably fall foul of Irish pension laws.

Brendan
 
Yes. I could but a property through my pension and rent it to you and you could do the same for me. The fund can borrow too and presumably that’s okay as it’s a not me/you borrowing.
 
Dr Strangelove said:
Does he accept the deposit interest?

Or is it only unethical for him to pay interest?
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No. I used to work for a bank with lots of Muslim customers and they’d set up a system where any interest earned on deposit was collated in a separate account and donated to charity.
 
mustang01 said:
No. I used to work for a bank with lots of Muslim customers and they’d set up a system where any interest earned on deposit was collated in a separate account and donated to charity.
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Interesting. Could be the reason why Bunq have the option to toggle deposit interest on or off (no charity donation option though!).
 
Christian teachings get around this by distinguishing between Usury and Lending.

The Presbyterians were more specific in the Westminster Standards which codified much of doctrine and policy of that Church.

In the UK Conservative Muslims use Sharia home financing deals to acquire homes. The Bank buys the home with the "owner" as a Freeholder. The buyer then leases the property from the bank, paying Rent as well as interest free payments towards the equity that they do not own.
 
Brendan Burgess said:
Yes, my friend did not think that the workarounds were Sharia compliant. He wants to comply with the spirit and not just the letter.
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The banking system and finance is one of the key reasons why the western world developed so much. Is it any wonder why there is so much poverty in middle east and north Africa when the central pillar of prosperity is rejected. However I still think this is a personal choice as obviously many Muslims have become fabulously wealthy using western systems or simply ignoring and fudging this stuff. I doubt sheikh Muhammad follows this particular dictat
 
I think it is good for the state to show flexibility by allowing Sharia Finance. If individuals have additional ethical objections, then I think they need to live with that.
 
I have looked into elements of this as part of my Masters thesis. Their is a section in the tax acts that talks about specified financial transaction. Itchy has linked the manual above. The gust of the section is that other financial systems as are allowed but will match as close as possible to the traditional system for taxation to ensure neither service is better of worse from a tax point. Using my example below the difference between the 500k and 400k would be treated as interest not capital in the banks hands. From a CGT point of view the purchases is deemed to have bought the house at the price the bank paid.

Islamic Finances looks at burden sharing. No profit can be ensured but can be earned. A normal deposit account has a target rate for the year. This is normally what the bank hopes to earn from your deposit. some of this will then be split with you as your reward from the transaction.

The closest I could see for a deposit account in Ireland that would be compatible are the Credit Unions.

When coming to buying houses their is normally two methods that can be used. One is a mark up system eg house is for sale for 400k. Bank buys house for this amount and sells it to you for €500k. You then pay the bank the 500k via monthly payments. The second option is more a joint ownership concept. Where both the buyer and bank have money in the house. Using the example of the 400k house with 100k deposit. The house is broken into 400 units. Day 1 the bank own 300 units and the person owns 100 units. The monthly payment is broken into two elements. Firstly part is used to buy the units from the bank, the second is rent on the units the bank owns.

If I recall Islam is the 3rd largest religion in Ireland but not sure if their is the population for a Islamic bank of Ireland to open but I wonder if a bank based in Europe would sell these mortgages and loans into Ireland as part of their services.
 
Philip S said:
I recall Islam is the 3rd largest religion in Ireland but not sure if their is the population for a Islamic bank of Ireland to open but I wonder if a bank based in Europe would sell these mortgages and loans into Ireland as part of their services.
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When ulster bank ,kbc and dansk bank have Already pulled out and they are mainstream banks serving everyone I doubt there would be much appetite for such a niche service here. They would still be under the same regulations as other banks and be required to hold a large proportion of assets as government bonds etc. I doubt Sharia finance could get around that as that would be unfair competition
 
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