Good news for Muslims and non-Muslims who want to buy a house without the risk of negative equity: halal banking is coming closer to becoming a reality. Since Sharif Soliman explained the benefits available to everyone in VU Magazine, he has noticed a dramatic increase in interest. The business law alumnus has elaborated the halal mortgage concept, and is conducting negotiations with mortgage lenders and the government.
Many Muslims in the Netherlands are forced to rent their homes instead of buying, because a mortgage is ‘haram’: Islam does not permit the receipt or payment of interest. Believers are only permitted to earn money on a transaction if both parties benefit equally, and share the risk. In a conventional mortgage or business loan, almost all of the risk is borne by the person borrowing the money. The bank has the right to foreclose on your home if you are no longer able to pay your mortgage payments. That is not the case with Islamic mortgages, but Sharif Soliman argues that such a mortgage would still be commercially attractive.
Soliman graduated as a business attorney more than a year ago with his thesis on halal banking. That thesis eventually grew into a book, titled Islamitisch financieren (Islamic Financing). At the law firm of NautaDutilh, he now works to bring Islamic banking closer to reality. “The article in VU Magazine got the ball rolling”, he says over the telephone. As a result of the media attention, several ministries have asked me for advice, and I’ve spoken with banks and other mortgage lenders.”
Halal credit for entrepreneurs
From a legal perspective, there are no obstacles to halal credit for entrepreneurs. For example, in the musharaka structure, the bank shares in the financed firm’s profits, but also in any losses it incurs. Soliman thinks that banks are still hesitant to offer the construction because they lack the know-how. “First, banks must invest in people who can explain and sell the product. I try to let the idea soak in, so that they will eventually be able to take that step.”
The halal mortgage is a bit more complex, but the potential demand is huge. In a halal mortgage, the bank purchases the home which the client wishes to have, after which the bank sells the home to the client for the purchase price, plus a fixed profit margin. The problem is that consumers in the Netherlands legally have three days to reconsider their purchase, but a bank does not. As a result, the bank runs the risk of owning a house they do not want. But Soliman has also received criticism from his co-religionists: “People asked me if this construction was truly halal, because a fixed profit margin is not the same thing as the shared risk that Islam advocates.”
Halal mortgage 2.0
That made Soliman reconsider, and he discovered a variant in Malaysia that seems to solve all of the problems. “You purchase the house together with the bank. Say that it costs € 100,000; you invest € 10,000 and the bank invests € 90,000. That means the bank is the owner of the house, and you rent it from the bank. But you also pay a periodic amount to gradually buy the bank out over time.” At agreed-upon intervals comparable with the fixed-interest periods of a standard mortgage, the house is re-appraised and the remaining buy-out amount is adjusted proportionally according to pre-arranged agreements. That means the parties share the risk: the bank bears the risk for its own investment in exchange for rent.
Negative equity a thing of the past
In this form of mortgage, it is impossible to owe more money after selling your house. Soliman “Imagine that you want to move after 15 years, and you own 60% of the house. But perhaps the house has appreciated in value. In that case, you have to pay the bank a percentage of the profits, as it was co-owner. But if the house has depreciated in value, then you don’t have negative equity, because you never owed the bank anything. You still incur a loss, because you receive less than what you paid for the house, but you don’t have a debt to worry about.”
You can even sell back pieces of a house
Soliman adds: “Imagine that after 15 years you own 50% of the house. But then you get divorced or lose your job, and you face difficult financial circumstances. In that case, you can agree with the bank that you will only pay the rent, and temporarily interrupt the payment of the purchase amount. The bank still incurs no loss, as the rent is paid, which forms the bank’s profit, while the occupant gains a bit of breathing room. In fact, if your money problems are too severe, you can even sell a percentage of your house back to the bank, and you can use this money to pay the rent!” That’s quite a bit different from being evicted after the forced sale of your home.
Also interesting for banks
With this construction, the mortgage not only complies with the Islamic ideal that all parties involved in a financial transaction should share the profits and loss; Soliman believes that it is as interesting for the banks as it is for home buyers. “First, banks can open a whole new market: Muslims who had not been able to buy a house due to their religious convictions. Secondly, the banks can profit from rising real estate values.”
What do you think?
Would you like to take out such a mortgage? If you are a banker: what do you think about this product? Would it truly be commercially attractive? Reply below!
> More information about halal financial products is available in the previous interview with Sharif Soliman.
> Soliman hopes to organise a seminar on the topic in the near future. He recently gave a presentation on Islamic banking in Pakhuis de Zwijger.