Ride: Minnesota State Government Program Purchases Homes for Muslims So They Avoid Interest Charges: More Proof Government is Stupid

Monday, March 9, 2009

Minnesota State Government Program Purchases Homes for Muslims So They Avoid Interest Charges: More Proof Government is Stupid

Islam teaches that it’s sinful to pay interest on a loan, so many Muslims never purchase homes when the move to the United States. The Islam religion makes no exceptions to the interest rule. Debt is not promoted in Islam. That’s about the change thanks to a government program in Minnesota. The program aims to create homeowners out of the United States' growing Islam population, but all it really is a play on words that deceives Muslims.

The program allows the state to buy a house knowing the Muslim will purchase it from the state. This is prearranged with paperwork. It then sells the house to the Muslim for the same amount the homeowner will have paid at the end of a thirty-year note. In essence, they are paying interest, but not actually calling it interest. Is the state of Minnesota jeopardizing the promise of 13 virgins for these people? This leads to a lot of business and morality questions. I want to know what happens when they decide to sell the house without paying it off. Do they take the bigger hit, or do they adjust it based on the interest that would have occurred to the day they sell it on?

The Minnesota Housing agency is the first in the nation to offer a religion a special program to purchase houses. Hussein Samatar, director of the African Development Center in Minneapolis, came up with the idea. If they were doing this for Christians, all sorts of hell would be raised. “Separation of church and state! Separation of church and state!” It severely upsets me that public schools respect your time to bow down to Mecca; yet, a high school football coach gets in trouble for a simple prayer in hopes that no one on the team will get hurt and they will play to their highest level.

There are banks in the United States that have Islamic lending practices. Chicago’s Devon Bank underwrites many of the loans for Muslims, and are working with the state of Minnesota to fund the loans for these houses.

To the American Muslims who participate in these types of programs. Anyway you look at it, you are still paying interest. They might not call it interest, but remember what Dan Rather once said (which made the 1980s HBO news parody, Not Necessarily the News) if it looks like a duck, if it quacks like a duck, it’s a duck. No matter what you call it, the extra you pay over the value of the house, is in my opinion interest.

1 comment:

akhterMarch 10, 2009 at 12:51 PM
It is not just the interest, silly==

Sharia investing explained
By Nick Louth, MSN Money Special Correspondent
October 07 2005
Saving and investing in line with religious principles is important for many Muslims, and an increasing range of financial products is now available to meet Sharia rules.
There are 1.8 million Muslims in Britain and surveys show about three quarters of them are interested in the idea of running their savings and investments in keeping with principles laid out in the Koran.
While Sharia products are in their infancy in the UK, the uptake is very rapid. Islamic Bank of Britain, one of the few specialist providers, says it has seen an “exponential growth” since offering its first Sharia compliant services a year ago.
Strict rules
Islam is very clear on a number of financial topics. While trade and investment are encouraged, Sharia rules prohibit involvement in alcohol, gambling, pornography, abortion, human cloning, defence, conventional banks or insurers, and most forms of entertainment.
Industries associated with pork are out, of course. However, the biggest difficulty for devout Muslims and those financial groups which aim to serve them is the principle of riba.
Riba means that you cannot either receive or pay interest, because Islam defines interest as a form of usury.
Hard to remove from the equation
Interest is hard to remove from any financial transaction. Interest is the price of money measured over time, and one of the cornerstones of economics.
The entire conventional banking industry, with products from mortgages through to credit cards and deposit accounts depends on calculating interest. How on earth do you remove it?
The only answer is to package the value changes we would normally call interest into another type of profit or loss.
When you look across the websites offering Islamic current and savings accounts and mortgages, this is what you see.
The products look the same on the surface, and even proclaim “competitive” rates measured against non-Sharia, interest-based products, but the structure of the financial proposition is entirely different.
Sharia current accounts
So long as you stay in credit, interest doesn’t play a big role in normal current accounts, so devising Sharia-compliant products is fairly straightforward.
The HSBC Amanah bank account, for example, is fairly typical. You get all the facilities you would expect, such as a cheque book, debit card, ATM usage, monthly statements and so on. You do not get any interest and nor are you charged any if you accidentally go overdrawn.
HSBC states that you must keep £250 in the account in order not to incur account maintenance fees. Most other Sharia-compliant current accounts, such as that offered by Lloyds TSB or Islamic Bank of Britain, merely seek a credit balance and only penalise you, though not with interest, if you go overdrawn.
Most banks are explicit that the money deposited with it in Sharia-compliant accounts will not be used for non-Sharia purposes, which means it cannot be loaned out like normal bank funds are, and must remain segregated.
Most Islamic banks use the principle of Qard or interest-free loan to underlie their accounts. That gives the bank the freedom to invest the deposited money rather than loan it, but the customer still has the right of immediate withdrawal.
Sharia savings accounts
Curiously enough, a basic Sharia savings account offering is problematic. The banning of interest means some other kind of return needs to be offered, but it most be sure and certain as interest would be. Banks such as Islamic Bank of Britain typically specify a rate which sounds like interest and is intended to be competitive with banks which do offer interest.
However, the return is generated by the bank not through loans to individuals or businesses, but by sale and purchase contracts under Islam’s Murabaha principle.
This means, for example, that someone wanting to buy, say, a piece of machinery for a factory would have it bought by the bank who would then charge a premium on top of the cost in exchange for receiving repayment over a number of years.
Yes, it may sound like a loan funded by interest, but it isn’t.
Alan Williams, sales and marketing director for Islamic Bank of Britain, explained that term deposits are funded in a similar way.
The bank will buy title to a certain amount of commodity, say copper, and then sell it immediately to someone who needs the metal. In exchange for deferred settlement of, say, three months, the buyer pays the bank a premium which funds the return for the saver.
Sharia mortgages
Most Sharia-based mortgages work on the principle of Ijara, a form of leasing, together with Musharaka which means a risk-reward partnership and covers the transfer of ownership.
This means that the bank buys the property for you, and your payments to it over, say, 25 years cover the value of the home as a living space in the form of Ijara, ie rental, while a diminishing Musharaka means that your payments held reduce the bank’s equity in the home.
In effect, the principles of loan and repayment have been turned into a type of co-operative trade, which is expressly allowed under Islam.
However, competition with conventional products always intrudes: As Lloyds TSB’s Emile Abu-Shakra explained, “the cost of the home finance deals do move in line with interest rates”.
According to Datamonitor, the Sharia mortgage market is expanding at 49% a year and by 2009 will be worth £1.4 billion.
Mortgage broker Halal Mortgages
Sharia property
This is a much easier concept because of the allowed principle of rent through Ijara. Investing in property either directly or through Islamic Trusts is certainly possible, and when done by the financial institutions themselves creates a financial engine which is capable of funding either Sharia savings accounts or Sharia mortgages.
Only one company, Ansar Housing Ltd, offers the general investor access to buying property for a Sharia mortgage fund.
Of course the usual questions of value and yield apply. Sufayan Gulam Ismail, chief executive of independent financial advisors First Ethical, notes that yields on rental properties net of overheads are currently only 5%, low by historical standards.
In a briefing on the company’s website, he says Property Investment Bonds run by firms such as Legal and General and Aviva’s Norwich Union are suitable for Sharia investment.
Sharia equities
This is very much like any form of ethical investing, but the details are trickier. The excluded categories are easy enough to follow, and there is an ancillary clause which allows investment in any of the prohibited activities providing it constitutes less than 5% of the companies activities.
This is of course subject to scholarly oversight. It is hard to see Sharia approval of any firm involved in pornography even if it constitutes a tiny part of the turnover.
Sometimes the principle of purification will be applied. For example, the investor may donate to charity that proportion of his returns which match the firm’s investment in impure activities.
One additional restriction worth bearing in mind is gearing. Islamic principle forbids the investment in any company where the debt to equity ratio is over 30%. That alone will remove thousands of potential companies from Muslim investors’ universe of possibilities.
Islamic funds
However, to make up for this difficulty, a plethora of Islamic funds have sprung up since the late 1980s offering ready-made Sharia compliant investments. Among them are Dow Jones Islamic Fund, and funds from HSBC, Brown Brothers Harriman, and BNP Paribas.
For a complete list of Islamic funds, click here
See DJ Islamic Fund home page
For those with a taste for higher risk, trade finance and private equity are certainly possible within Sharia strictures, though only the more wealthy investor need apply. Most banks specialising in such deals will tailor-make the investments as required.
Click here for the only Sharia Baby Bond available in the UK
Taxation
For years, returns on Sharia bank account were treated as dividends by HM Revenue and Customs. That certainly made them more tax-efficient than ordinary bank accounts, with a notional tax level of 10% rather than the 20% standard rate levied on savings, but ended up adding another layer of complexity to an already complex product.
However, since the Budget in March, Sharia bank accounts profits have been taxed as savings income.
Things to watch out for
If you are considering a Sharia-compliant financial product, you pretty much have to accept poorer value for money compared with conventional products.
However, that doesn’t mean that you shouldn’t shop around within those religiously acceptable products. As more and more financial institutions offer Sharia-compliant products this should get easier.
There are some basics issues to remember:
Many of these institutions are not high street names, so checking their regulatory credentials is extremely important.
Particularly make sure that they have a reputable board of Islamic scholars to ensure the quoted Sharia compliance is accurate
Be aware of the investment underpinnings of the returns you are receiving. While few are risky as such, the concept of deferred settlement introduces a possibility of default.
There are still some products which have so far defied creation: No-one in the UK yet offers a Sharia-compliant credit card.
ReplyDelete