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Banks Offering Loans to Muslims - The New Trend in Financing

A few years ago finding an interest free Islamic loan was near to impossible in America and other countries. A new financial trend has changed that now.

Banks, financial companies and even states are offering Islamic loans. Why has this new financial trend erupted? Plain and simple, it is all to do with money, the "Golden Goose." Countries all over the world are now getting involved in Islamic lending. Australia has recently announced their intention to offer Islamic loans causing mass panic in the small banking market.

How can small finance companies compare with states and countries offering loan packages to Muslims and others desiring to get into the new market? Banks realized that there was a lot of money to be made on Arabs or Muslims who had no other way to buy a home have now joined the new trend. The new trend is not first time home buyers programs, but banks looking for fatwas (decree by a learned scholar) and scholars to open their own "Islamic Interest Free Branch."

Why are Banks Interested in Islamic Loans?

Besides seeing a huge way to make money on the Arab population, banks also realize that an Islamic loan comes with many restrictions on the Muslim itself. Islamic loans come with strict guidelines such as:
  • No illegal paperwork can be done.
  • No short-sales (usually).
  • Community support for late payments.
  • No sub-standard mortgages.
  • Homes are purchased with security measures in tact.
Muslims everywhere want a mortgage, but according to Sharia guidelines, the Muslim household must be very sure that there is no danger of loss. Islamic banks rarely if ever short sale homes and will instead give charity to the borrower if the borrower loses their job.

Large non-Islamic banks may not grant zakat (charity) payments to the borrower, but realize the potential of the borrower having fear of Allah. No Muslim can go to heaven with a debt owed. This premise alone will make most Muslims strive extremely hard to maintain the loan to the best of their ability.

Minnesota Offering Islamic Loans

Besides banks jumping into the Islamic loan program, states are now offering loans. Last year Minnesota announced that they too would be offering Islamic loans. This caused great concern in the financial community as smaller loan companies could not compete with a large state run program. There was talk of suing the state for monopolizing the market.

What is a True Islamic Mortgage?

The best type of Islamic loan or mortgage is one involving an Islamic bank who does not have or benefit from interest in anyway. This would mean that no regular bank could open a branch just to attract borrowers. Even though the branch is following the Sharia guidelines that have been in place for centuries, this bank would be second choice.

Finding a true Islamic bank is the problem for many Muslims, so fatwas were issued giving alternative choices to purchase homes. A Muslim or non-Muslim may purchase a home with  interest if there is a due hardship forcing them not to be able to rent in the area they are in. This fatwa is called the "Law of Necessity." This fatwa should only be used in the worse of situations and not to be entered into lightly.

The second choice is an alternative bank offering Islamic loans following the Sharia guidelines. There are many places all over the world honoring this now. Read this article on places available for Islamic loans: Where are the Islamic Banks Located in America.

Types of Islamic Mortgages Available

There are two main types of mortgages available. The first and main type is "Murahaba." With this type of mortgage, the bank purchases the home and resells the home back to the borrower at a profit to the bank. This profit rate usually is comparable to conventional interest rates or slightly higher.

The second type of plan available is "Ijara." With this plan the borrower can rent to own the property with a declining rent schedule. They do not own the property until the property is paid in full. Scholars have stated that this plan is the most acceptable in Islam.

A Muslim's Dream Fulfilled or His Worst Nightmare

The truth in lending act requires all financial companies to disclose the terms of all loans and I suggest any person seeking an Islamic loan to contact the bank prior to filling out an application for a loan.

Few banks and financial companies publish their rates online other than Noor Islamic Bank in Dubai, UAE. Fees vary from financial company and may be reflected in the rates charged. Some will charge a higher application fee and a lower profit rate. A new borrower seeking to own a home may well look into seller financing as a mortgage alternative also.

Resources

● "Muslim Bank Loans in Australia: Halal or Haram?" (June 14, 2009) Ozsoapbox
● MacCharles, Tonda, (January 20,2008) "Muslim Leader Calls Sharia Loans a Con Job,"
The Star
● Ahmed, Imaduddin "What if the world had been following Islamic financial practices?"
(January 7, 2011) Guardian

Photo courtesy of Photobucket: soccersloy13