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Wednesday, 2 December 2009
May they live in interesting times

There is no such thing as a free lunch, and no such thing as an interest free loan. "Interest free credit" simply means that you can’t negotiate a discount as you could if you paid cash. But “interest free” sounds good, and it makes people feel good.

It makes Muslims feel better than good - they feel holy. How much better it is to take out a Sharia compliant mortgage, such as the one Esmerelda drew my attention to, than to go the way of the infidel. And infidels can get them. From Yahoo! Finance:

[T]hings work in a slightly different way to a mainstream mortgage. Basically, you buy the property alongside the bank (they will stump up 70%-80%). Then, over the term of your mortgage , you make monthly payments towards the bank, buying its share of the property over time.

And the total of those monthly payments? Might it be more than the 70% - 80% of the market value of the property at inception? And the difference between the two figures - what should you call it? And does the bank bear the risk of a fall in the property’s market value, or the rewards of a rise? Could this be, in substance but not in form, a secured loan like any other mortgage?

If you doubt it, look no further than the next paragraph, where the writer sells this "Sharia compliant" mortgage to infidels (my emphasis):

And the products do look pretty attractive - for a deal of up to 80%, you will be facing an effective interest rate of 4.99%.

The lowest rate you can get elsewhere at that loan-to-value is a tracker from Royal Bank of Scotland at Bank Base Rate plus 2.39% for two years, which is obviously much more attractive, but far more of a risk should Base Rate start to move upwards. It will also set you back £1499 just to get hold of it, compared to £299 for the Sharia'a deal.

In truth, the best thing to compare the mortgage to is a long-term fixed rate . And the best five-year fixed rate at 80% loan-to-value, from Nottingham Building Society, comes at 5.59% and will cost the best part of a £1000 in mortgage fees.

Effective interest rate? Of course there is an effective interest rate. The product is no more "interest-free" than a rock band's amplifier that “goes up to eleven” is “one louder”. As I wrote last year, this is the essence of Islamic banking. The prohibition on interest (riba) is circumvented by calling it something else, for example “rent”, "premium on repurchase" or “extra capital”. Everyone knows that money today is worth more than money tomorrow. Omar Khayyam preferred to “take the cash and let the credit go”. Muslims know this too, and if you pay them tomorrow they will make you pay – one way or another – more than you pay today.

This may be a good product; its effective interest rate may be better than that of the Nottingham Building Society (although without legal title to the property), but the price - the domestication of Islam - is way too high.

Posted on 12/02/2009 1:55 PM by Mary Jackson
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