|Shariah mortgage comes without explicit interest
|A mortgage without interest may sound like a pea without a pod. But for many of the Muslim faith, it’s the only way to buy a home with a clear conscience.
Talal Chehab says there’s a waiting list of almost 5,000 families who are interested in using Sharia-compliant mortgages. Photo Jennifer McPhee
According to Sharia law, business activity must be grounded in moral and ethical principles. Trading in tangible assets or services is permitted, but simply making money from money is considered usury and is forbidden. So lending transactions cannot involve paying or earning explicit interest.
Investments also can’t be in prohibited areas such as gambling, alcohol, pornography, or arms dealing. Transactions cannot be considered high-risk, because gambling or mere speculation is not allowed.
“Some people [wait to do that], since there was no other option,” says Omar Kalair, founder and president of UM Financial Inc. (UM is short for United Muslim).
“But if there isn’t, and someone is trying to raise a family, some scholars allow it.”
UM Financial eventually began negotiations with the Credit Union Central of Ontario, and it agreed to provide $4 million in financing as part of a pilot project.
“We were able to work with the credit union product development team and our own lawyers in designing a mortgage product that complied with the Bank Act and Credit Union Act, and was also Sharia-compliant, to our own Sharia advisory board for us to sell it within our community,” says Kalair.
However, due to a concentration limit, the credit union could not lend more than $20 million dollars to any one entity, says lawyer Talal Chehab of Chehab & Khan Barristers and Solicitors, who developed the product for UM Financial.
“After we got to that limit, they found other credit unions within their organization to buy off parcels of mortgages. So from $4 million, we’ve grown to $200 million.”
But for the last year-and-a-half, it has almost exclusively used a “Musharaka” model, a risk-and-reward sharing partnership arrangement, because it’s easier to facilitate and it’s the model that Sharia scholars recommend.
The rent is calculated on a declining basis over time. By making monthly payments, the client buys out the company’s shares of the property.
The financing agreement with the credit union is Sharia-compliant, according to a “Mudaraba” model. Profits generated from monthly rental payments are shared between UM Financial and the supplier of funds. The bulk of the profits generated go back to the credit union, and UM keeps a small management fee.
UM Financial is also working with one of the Big Five banks in Canada to launch a full-suite of Sharia-compliant financial products, including mortgages.
UM financial has provided financing for roughly 500 mortgage transactions so far.
Another organization, the Islamic Co-operative Housing Corporation Ltd., has offered Islamic-compliant housing for 26 years based on a similar decreasing Musharaka partnership.
In this agreement, the members and the co-op purchase the house and members pay a proportional rent to the co-op. Members are required to increase their shares and ownership of the house over a period of time. They sign an occupancy agreement, and are not tied into a long-term contract.
And as they accumulate more shares, the rent decreases. When the unit holder purchases all of the required shares, they surrender the shares to the co-operative, and title is transferred from the co-op to the unit holder.
“That’s the partnership concept,” he says. “You share the risk. You share the profit and loss.”