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Friday, 29 November, 2002, 10:39 GMT
Islamic mortgages 'worth billions'
A pile of coins
Islamic mortgages could unlock a lucrative market
The Islamic mortgage market in the UK could be worth billions, a new report predicts.

According to market researchers Datamonitor, demand for Islamic mortgages in the UK is so strong that gross advances could reach 4.5bn ($7bn) in 2006.

Conventional mortgage products are not strictly suitable for the UK's 1.8 million strong Muslim population as they are not compatible with Sharia law.

Under Sharia law, it is forbidden to pay or receive interest, and making products compliant is very expensive.

A Bank of England working group is currently seeking to redress the problem.

Open in new window : Islamic mortgages
An example of how they compare

The United Bank of Kuwait and West Bromwich building society are the only lenders in the UK to offer mortgage products that are compatible with Islamic law.

As a result, the UK's Islamic mortgage market is currently worth only 40m, compared to the total home loan market, worth some 647.8bn.

Discussions are taking place between the government and bankers to change the rules to make Muslim mortgages more affordable.

According to Datamonitor, about 725,000 people in London alone are Muslims.

In some areas, such as Leicester, Muslims account for as much as 20% of the local population.

Sharia-compliant products currently available in the UK are based on Ijara and Murabha methods.

Under an Ijara finance plan, the customer chooses the property and agrees a price with the vendor in the normal way.

The property is then purchased by the financier, who takes its legal title.

The property is then sold onto the customer at the original price, with payment spread over an agreed period of time.

During that time, the customer also pays the financier rent for the use of the property. Once the agreed period of time has elapsed, ownership of the property is transferred to the customer.

Double stamp duty

Under a Murabaha plan, the customer chooses the property and agrees the price with the vendor in the normal way.

Similarly, the financier then purchases the property from the vendor, but on the day of completion it is immediately sold on to the customer at a higher price.

The higher price is determined by the value of the property, and the number of years that the financier allows the purchase price to be paid over and the amount of the first payment.

The customer then makes regular monthly payments until the purchase price is paid.

One of the major factors holding back the market is that stamp duty must be paid twice on Islamic mortgages: initially by the finance company, and then by the customer.

These transactions must be genuine and involve the actual transfer of legal ownership; otherwise the mortgage is not deemed Sharia compliant.


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16 Oct 02 | Business
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