Comments on: Adelaide Bank launches new housing finance product.

By: Club Troppo » Missing Link

Club Troppo » Missing Link — Tue, 07 Aug 2007 07:32:34 +0000

[...] Amir at Austrolabe discusses a new Adelaide Bank housing finance product which may have the potential to meet the Muslim prohibition on interest with further development: In the process he also calls on Muslim religious figures to figure out new ways of helping Muslims adapt modern instruments to religious prohibitions: Itâ€™s unlikely that Adelaide Bank created this product with Muslim customers in mind but shared equity schemes of this type may have the potential to offer Muslims a permissible mode of finance that satisfies the risk management and other requirements of the banks. Regardless of the efficacy or appropriateness of this particular scheme, it is encouraging that banks are willing to look beyond the more traditional lending products and may be open to innovation. [...]

By: JDsg

JDsg — Mon, 26 Mar 2007 23:54:29 +0000

What is stopping banks offering housing loans where the interest rate is fixed for the term of the loan?

Technically, no reason. Realistically, the fact that market interest rates are fairly dynamic over the long-term, which could cost the banks a considerable amount of interest income over time, especially if the market interest rates rise in comparison to the fixed rate. Far better, from the bank’s perspective, to let mortgage rates track the market so that potential losses are less.

Isn’t a conventional mortgage just a diminishing partnership anyway?

I’d be hesitant to call a bank-mortgagee relationship a “partnership” when one party has the ability to take the other party’s property should the second party run into cash flow problems. Better, IMO, to call it a contractual relationship.

By: Abdullah Clarkson

Abdullah Clarkson — Mon, 26 Mar 2007 21:53:42 +0000

Very interesting comments.

1. What is stopping banks offering housing loans where the interest rate is fixed for the term of the loan?

2. Isn’t a conventional mortgage just a diminishing partnership anyway?

By: Amir

Amir — Sat, 24 Mar 2007 04:51:46 +0000

Mango: Most Muslims seem to either dispose of the interest received from their savings/current accounts or they use one of the accounts which don’t pay any interest (I believe some of them offer this). An Islamic current account of the sort offered in the UK probably couldn’t be justified in an Australian context because I’m not sure the Muslim market for such services is big enough. If, however, it was marketed or structured as an “ethical” account in which none of the money deposited is then used to finance a range of haram or unethical industries or projects (e.g. no pornography, no nuclear weapons, nothing of questionable environmental credentials, etc), then it might be viable but even then I suspect the costs involved to the bank would be pretty substantial.

A more immediate (and potentially lucrative) area for the retail banks and other financial institutions is the development of halal investment vehicles and/or the certification of existing ones. The most immediate need is for a halal superannuation fund, but I think there are also opportunities worth exploring in the development/certification of managed funds and other investment vehicles. With regards to superannuation, Muslims either have to establish a SMSF (with all the costs and regulatory headaches associated with that) or use an existing fund and then, at some point in the future, try to work out what portion of the income/capital growth can be attributed to interest or forbidden dealings (a ridiculously complex undertaking which I doubt anyone could actually do).

By: Mango

Mango — Fri, 23 Mar 2007 12:22:37 +0000

“If anyone has any thoughts on what benefits non-Muslims might get from Islamic finance products”

Non-Muslims snap up Islamic accounts: http://news.bbc.co.uk/1/hi/business/6168800.stm

By: Andrew Reynolds

Andrew Reynolds — Fri, 23 Mar 2007 03:06:48 +0000

Amir,
The sharing of risk on a mortgage may make it interesting – when you take out a mortgage you are (perhaps implicitly or unknowingly) making a bet on the future direction of rental costs, interest rates and capital values.
If you are pessimistic on these then sharing the risk of them with your bank may be attractive – you may well end up ahead of where you otherwise might have been. As rents are typically lower than interest rates these may also work better for those on low, or lumpy, incomes.
Many of the other structures share similar concepts – this gives you further options on financing which may work for your business. If the legislative or regulatory differences were taken away I would expect some of these to be popular.
Some current structures may also work – some of the tax-driven products out there already pay no interest and only return capital.
I just see it as taking another look at the possible products – some that may have been only marginally profitable become more likely once the Muslim market is taken into account – an extra few thousand consumers who may be more likely to buy the product could well make the difference.

By: Amir

Amir — Thu, 22 Mar 2007 14:51:34 +0000

Thanks for your comments.

A Bai Bithaman Ajil contract is similar to a murahaba contract in that the bank buys the property and then sells it to the customer at a profit. The difference is that whereas murabaha is paid off incrementally, the BBA contract is paid off in a single installment at a point in the future. In that case, my understanding is that the borrower keeps any profits or endures any loss if he sells the property with the debt owed remaining constant, so it differs in that respect from what Bank Adelaide have.

I wonder what benefits these sorts of structures would offer non-Muslims or people whose motivation is other than purely religious? In many cases, Islamic products end up more expensive because of all the inefficiencies that are introduced due to, for example, double stamp duty on murabaha and BBA contracts.

If anyone has any thoughts on what benefits non-Muslims might get from Islamic finance products, I’d be interested in hearing about it as it is not something we read or hear much about. Usually, it’s just said that Islamic finance is ‘fairer’ without exploring whatever financial or taxation-related benefits might also be present in specific contracts.

By: Andrew Reynolds

Andrew Reynolds — Thu, 22 Mar 2007 06:50:11 +0000

Amir,
This is what is typically termed a “reverse mortgage”, where the people typically own the house outright initially and then decide to take out a mortgage over a smallish proportion to fund their lifestyle. The overwhelming majority of these are where retired people, having already paid off their mortgage, want to release some of the capital in their homes to help fund their retirement.
Some do take them out in the way described by the Herald, but this sort of product works best for retired people – with the payment for the mortgage taken from their estate on their death.
You are right on the loss participation issue – it cannot be regarded as a Musharakah agreement as the losses are not shared on the equity participation ratio – but it is close. It is probably actually closer to my understanding of a Bai’ Bithaman Ajil arrangement – but it probably has the same problem. I am just not as familiar with that structure.
What I am looking towards is moves even further down this route – if I hear of any I will post it on my blog and let you know. Variations of this are just the sort of innovative structure that can be made to work even for us infidels and also comply with Sharia.

By: Club Troppo » Missing Link

Club Troppo » Missing Link — Mon, 19 Mar 2007 03:35:54 +0000

[...] Amir at Austrolabe discusses a new Adelaide Bank housing finance product which may have the potential to meet the Muslim prohibition on interest with further development: In the process he also calls on Muslim religious figures to figure out new ways of helping Muslims adapt modern instruments to religious prohibitions: It’s unlikely that Adelaide Bank created this product with Muslim customers in mind but shared equity schemes of this type may have the potential to offer Muslims a permissible mode of finance that satisfies the risk management and other requirements of the banks. Regardless of the efficacy or appropriateness of this particular scheme, it is encouraging that banks are willing to look beyond the more traditional lending products and may be open to innovation. [...]

By: JDsg

JDsg — Fri, 16 Mar 2007 02:22:02 +0000

…it’s all well and good to explain why you think insurance is riba, gambling or, as some say, an oppressive act committed by the insured against the insurer, but why don’t people come up with workable alternatives?

Because that would most likely require several years worth of work experience in a financial field after getting (at a minimum) a Bachelors degree in Finance.

It’s so much easier to criticize and tear things down than to build them up.