Credit union offers "Islamic mortgage"

[nitroglycol]

This is interesting:

Wednesday May 5, 2010 - Winnipeg, Manitoba – Assiniboine Credit Union, in partnership with leaders from Winnipeg’s Muslim community has developed the first Islamic Mortgage of its kind in Canada, answering a need that no other financial institution has been able to, according to Winnipeg’s Imam and respected Scholar of Islam, Shaikh Hosni Azzabi.

After four years of research and development, Assiniboine Credit Union launched its ACU Islamic Mortgage today. Approved by a board of Islamic scholars, the special financing arrangement was designed to address Islamic law that says paying interest on money is not acceptable and is considered usury by the Qur’an. While there are a few small Islamic financing institutions in Canada that obtain funding from a third party and make it available to Muslim homeowners, this is the first mainstream financial institution in Canada to offer an Islamic mortgage directly to members, allowing them to have a personal relationship with the financial institution.

“We call this financing arrangement a ‘Declining Partnership Agreement’ and it is based on the Islamic shared ownership concept called ‘musharaka’”, says ACU’s Vice-President of Corporate Social Responsibility, Priscilla Boucher. In the context of musharaka, the Muslim family and ACU will each contribute to the purchase of a home and each has an ownership share in the property. The family enters into a contract with ACU to purchase ACU’s ownership share over an agreed-upon period of time. During this time, the family has exclusive rights to live in the home and in exchange they agree to pay ACU a profit. At the end of the contract the Muslim family is the sole owner of the home.

Despite the product's name, the credit union told CJOB that this mortgage is available to anyone, which should come as no surprise (ever heard of someone being turned away from a kosher butcher for not being Jewish?) It will be interesting to see how these mortgages compare with conventional ones. ACU does require 20% down, so it's a bit harder to qualify for than many mortgages; still, it's an interesting idea.

[Bearster]

Re: Credit union offers "Islamic mortgage"

The legalization of interest provided a big incentive to people to *save*, because they could lend their savings to productive businesses and earn interest. Savings and capital accumulation are one of the factors that enabled mankind to climb up out of the abject poverty of the dark and middle ages.

[karim0028]

Re: Credit union offers "Islamic mortgage"

Alot of these "islamic" mortgages are nothing more than a conventional mortgage in disguise... The key differentiator is what happens if you default... In a normal partnership if one side of the deal fails to perform the other doesn't automatically get everything; as its a partner NOT a lender... Usually the partnership is dissolved and both sides split the profit or loss according to the share of ownership at the time of dissolution.... Thus the "borrower" doesn't lose everything in the deal with the "lender" getting the full asset... If the sale of the house loses money both sides would be responsible for it and split the loss, just like a true partnership...

This article doesn't say how this is differentiated from a regular mortgage aside than that it is blessed by some council and puts some fancy term of "declining partnership agreement".... The key is this declining partnership agreement is secured by a mortgage, which in fact places it as a creditor (i am assuming in the same capacity as in the US) and if you default i wonder if they would share any profit/loss based on your percentage ownership or just foreclose like any other mortgage... In the US and for the most part anywhere in the West, the creditor gets every cent owed.... That is the antithesis of a partnership; where you split P&L...

Usually the key to musharaka (as i understand it) is that no one side is completely insulated from risk, as in you dont automatically have a guaranteed profit at the expense of someone else... So that both sides do their best to make it work, unlike a regular mortgage where the bank doesnt care about the borrower bc in the end it will sell to someone else for the majority of its stake (or as in a foreclosure will only try and get as much for the property as it is owed, it looks only after its interests, which would not be the case (malfeasance) in a partnership).... Unless that is clarified in the original "partnership agreement" it would be identical to a conventional mortgage in everything but name... If they do in fact share p/l then its legit, bc the CU would make its money on its share of the rent (as they term it profit), according to its partnership percentage and thats why it would change every 1-5 years or so to adjust percentage ownership.

[karim0028]

Re: Credit union offers "Islamic mortgage"

Bearster, i beg to differ, your using a cause and effect that dont hold water... While Europe was in the dark ages the middle east was flourishing in trade, academics, science, travel and everything else, all without the use of interest.... So it just doesn't hold water.... Business and trade make money and everyone is better off, interest for the most part enslaves the borrower.

[radon]

Re: Credit union offers "Islamic mortgage"

Alot of these "islamic" mortgages are nothing more than a conventional mortgage in disguise.

It has to be if the "lender" gets a profit. They are kidding themselves and this is just another name for interest.

And in the spirit of sharing loses I wonder how much the family is going to be forced to cough up on the short sale of the home?

[radon]

Re: Credit union offers "Islamic mortgage"

Bearster, i beg to differ, your using a cause and effect that dont hold water... While Europe was in the dark ages the middle east was flourishing in trade, academics, science, travel and everything else, all without the use of interest.... So it just doesn't hold water.... Business and trade make money and everyone is better off, interest for the most part enslaves the borrower.

If it provides no competitive advantage then why has the middle east been a relative backwater for the past few centuries. Or are you implying that banking has no impact on relative growth.

[GRG55]

Re: Credit union offers "Islamic mortgage"

If it provides no competitive advantage then why has the middle east been a relative backwater for the past few centuries. Or are you implying that banking has no impact on relative growth.

To suggest, as you appear to be, that the reason behind the Middle East being a relative backwater is due to the "the legalization of interest" elsewhere [in presumably more enlightened jurisdictions] is just about the most absurd thing I have ever read on iTulip...

[karim0028]

Re: Credit union offers "Islamic mortgage"

Banking offers no good competitive advantages what so ever; except when used as a non military weapon; its a way to create a virtual empire w/o all the costs of occupation.... The same way the IMF is used, to subdue a nation via debt and the end result is always austerity measures... Its like taking a crack addict off crack.... Is the drug dealer helping the addict by giving him crack bc it makes him feel good? Again, invalid cause and effect....

The middle east has been a back water for the last two centuries due to stagnation in thought, not bc of lack of charging interest.... Its like asking why did the Egyptian, Roman, persian, greek, chinese, russian & ottoman empires fall? Was it bc of lack of banking/interest?

I can recommend a good book to understand the mechanism for this... Google, "Economic Hitmen"

Also


As a matter of fact the middle east/roman region was the originator of most of the financial and legal innovation we now have like cheques, forward contracts, trusts, joint ventures, etc... Lets not pretend that these "innovations" are some how European or American in origin or recently discovered and are what give us our current advantage..... What gave us (American/Europeans) an advantage was that we never rested on our laurels.... Banking and finance is as old as Christ and most likely alot older, its probably the second oldest profession ...

http://en.wikipedia.org/wiki/Islamic...s_in_the_world

And from here : http://en.wikipedia.org/wiki/Cheque

The ancient Romans are believed[4] to have used an early form of cheque known as praescriptiones in the first century BC. During the 3rd century AD, banks in Persia and other territories in the Persian Sassanid Empire issued letters of credit known as Ṣakks.
Muslim traders are known to have used the cheque or ṣakk system since the time of Harun al-Rashid (9th century) of the Abbasid Caliphate. In the 9th century, a Muslim businessman could cash an early form of the cheque in China drawn on sources in Baghdad,[5] a tradition that was significantly strengthened in the 13th and 14th centuries, during the Mongol Empire. Indeed, fragments found in the Cairo Geniza indicate that in the 12th century cheques remarkably similar to our own were in use, only smaller to save costs on the paper. They contain a sum to be paid and then the order "May so and so pay the bearer such and such an amount". The date and name of the issuer are also apparent.

So, to answer your question, NO, its not an impact on growth... Banking is a TOOL that enables commerce and the exchange of labor or production for something of value, charging and collecting interest adds nothing of any redeeming value.... If i look around me in the US, i see a "rich" govt and broke people (majority in debt up to their eye balls, mortgage, car payment, CC, etc)... I go visit the middle east i may see a broke govt, but the people actually own their "stuff"... At least thats the way it is now, until the banks start proliferating into the system, pretty soon, every one will be in debt just like here....

[sishya]

Re: Credit union offers "Islamic mortgage"

Though I personally hate compund interest, I don't think Islamic banking will help.
It says the only advantage for the Lender is a profit - based on what. If money is diluted
then Lender is at total loss. This is the reason I think only USA issues 30 yrs bonds because they
try to keep dollar value less diluted over the 30 yrs period. All other countries can only give variable
interest loans.

This Islamic system can work only if currency is kept standard like a Gold based Currency.
Or at the end of the mortgage or early re-payment(sold house), then lender also need to share
the 80% of the profit based on their equity at that time.

[karim0028]

Re: Credit union offers "Islamic mortgage"

Again, NO.... In a typical partnership deal the non-resident partners profit is his share of the rent the resident partner pays... The deal would be structured as follows...

We are 50/50 partners. I put down payment 50K, Banks puts up balance (50K)

I (resident) gain by living in the property...

Fair Market Value Rent is 1000.00

Since we are 50-50.

I would pay the partnership 1000.00

Bank (50% partner) gets 500.00 profit + Part of its balance, since i agreed to extinguish its partnership in a certain number of years...

I as second partner get (500.00 profit - what ever i agreed to pay the bank so i can extinguish its partnership interest). I am not in debt to the bank, i am buying out their position. Their profit is the rent collected based on FMV....

The entire concept is that in any business deal there has to be risk, on both sides; otherwise one side gets all the benefit while essentially taking no real risk and ends up with the entire enchilada... The deal is structured based on the FMV of the rent on the asset, not on a set interest rate.

As such if rental value goes up the banks share of the higher rent would go up (as a percentage of what it is its partnership percentage is at that point in time....

If rent goes down, then its share of the rent goes down accordingly as well..

This way both sides are in charge of due diligence, if the business deal doesn't make sense (such as the last 10 years in housing) then it would not be in the banks best interest to enter this partnership and as such would decline this deal, since rents were over valued and were likely to decline....

Also, this model of finance actually is business not lending, as such you are more likely to have a robust economy since its not debt piling up, but actual equity and innovation....

[sishya]

Re: Credit union offers "Islamic mortgage"

Alot of these "islamic" mortgages are nothing more than a conventional mortgage in disguise... The key differentiator is what happens if you default... In a normal partnership if one side of the deal fails to perform the other doesn't automatically get everything; as its a partner NOT a lender... Usually the partnership is dissolved and both sides split the profit or loss according to the share of ownership at the time of dissolution.... Thus the "borrower" doesn't lose everything in the deal with the "lender" getting the full asset... If the sale of the house loses money both sides would be responsible for it and split the loss, just like a true partnership...
.

yes a true partnership would be good, so even profit should be shared as per partners equity at that time of selling the house or repayment of loan or default. Only then can Lender survive especially if currency is a diluting one(unlike a Gold standard)

[sishya]

Re: Credit union offers "Islamic mortgage"

Again if money get's diluted, rent will go up automatically and it is just like variable interest. I still think US 30 yr mortgage is
the best deal.

Also who decides the market rent for a house. It looks shaky. At least with 30 yr loans, there are competing lenders who
set interest rates.

[karim0028]

Re: Credit union offers "Islamic mortgage"

How do you decide the FMV for a house you rent? You get bids, same as any open market... Its pretty easy to implement...

Again if money gets diluted, that a risk you took when entering into realestate, but you forget you are also an equity owner, so your share of the profit goes up....

I know its hard to comprehend, but you are a business partner, you are not in debt, if rent goes up you get a bigger share of it, since you are also buying out the other partner, who until the his share is fully paid for gets his/her share of the rental profit.

Key thing to remember Owners dont get evicted, Debtors do! Thats the difference.... It would eliminate negative equity concept right off the bat.

[radon]

Re: Credit union offers "Islamic mortgage"

To suggest, as you appear to be, that the reason behind the Middle East being a relative backwater is due to the "the legalization of interest" elsewhere [in presumably more enlightened jurisdictions] is just about the most absurd thing I have ever read on iTulip...

Almost as absurd as you claiming that the introduction of modern banking during the renaissance had no impact on economic growth.

[Bearster]

Re: Credit union offers "Islamic mortgage"

Hopefully this doesn't degenerate into West vs. Middle East!

There are millions of factors that were different then vs. now, and East vs. Middle East, so obviously it's a little difficult to compare apples to apples. :P

But I think it was obvious and dramatic when interest was legalized in the West, that economic growth in the West accelerated.

Why? Because large-scale enterprise requires accumulated capital. But people have no incentive to accumulate much capital--and none to risk lending it out--without interest.

The pure fiat paper system we have today, and the "banks" which it enables and subsidies should not be confused with the original concepts of (gold) money and interest.