Mortgage Compliance with Shariah Law
Wealth generation is not contrary to Islamic principles, but Islamic scholars insist that financial dealings should be based on a partnership model where gains and losses are shared equally between the participants.
Because payment of mortgage interest is seen as an uneven transaction where benefits are not shared equally (i.e. one party pays and the other receives) it falls foul of Shariah law. However, defining exactly what constitutes riba (usury) is not a trivial task. Islamic mortgage providers consult panels of Islamic scholars when developing new Shariah compliant mortgage products and also use them to monitor existing Islamic mortgages. As religious interpretation is not an exact science, anyone considering an Islamic mortgage should confirm to their own satisfaction that the financial transaction on offer obeys all the Shariah rules as they understand them, before committing themselves to a particular mortgage product.
Other Issues Affecting Islamic Mortgage Provision
Most financial institutions in the UK offering Islamic mortgages also market traditional interest bearing mortgages. They may also finance breweries, distilleries, casinos, pig farms and other businesses that contravene Shariah law. Strict Muslims who object to these associations may find themselves severely restricted in their choice of mortgage provider.
Generally, mortgage providers operate by attracting deposits from customers (and paying them interest) and by borrowing money at a lower rate than they are lending it at. Few mortgage providers (including Islamic mortgage providers) can obtain sufficient funds to maintain their level of mortgage lending without going to the money market on occasions. The implication is that even though the financial product that an Islamic mortgage provider offers to a Muslim customer is halal (permissible), the source of this finance is likely to be the mainstream money market where interest is charged.
Aside from the theological arguments as to whether this state of affairs is acceptable, fluctuations in interest rates could have an adverse effect on the Islamic mortgage market. Adjusting monthly repayments to take account of increases in interest rates would be difficult to justify to Muslim customers and could result in Islamic mortgage providers' margins being squeezed significantly.
Islamic mortgage providers consult Islamic scholars to ensure that their mortgage products are Shariah compliant;
Most financial institutions that provide Islamic mortgages also offer interest bearing mortgages;
Islamic mortgage providers borrow money in the open market to fund Islamic mortgages.