Diminishing Musharaka...

Back in the early 1990s Eddie George, the future Governor of the Bank of England, met a young Muslim couple who told Mr George of their joy in finally acquiring a home of their own in the UK, and of their regret in having to compromise their religious beliefs in order to finance it. The payment of interest (“riba”) is explicitly prohibited in the Koran. But how do you take out a mortgage without paying interest?

Mr George determined to find an answer. As Governor of the Bank of England he brought bankers and lawyers together with religious leaders to find a way of financing house purchases in line with Islamic principles. In 2003 HSBC Amanah, the Islamic banking arm of HSBC, became the first high street bank to offer its customers a Shariah compliant mortgage.

However in practice this solution remained out of the reach of many Muslims, as buying a home through the plans suggested exposed the purchaser to a double stamp duty charge. In contrast, a normal mortgage will only trigger one charge to stamp duty. However fortunately the Finance Act 2003 introduced special reliefs to remove this extra tax burden.

Today the high street offers a dazzling choice of Islamic Home Finance plans. Through the Diminishing Musharaka, for example, the customer and the bank buy the property jointly, and the customer then pays the bank rent on its share of the property. A slice of this rent is used to buy back a bit of the bank’s share, so that over time the bank sells its entire share to the customer. Thus the buyer acquires a home without paying any interest.

Although some scholars have criticised Islamic Home Finance plans, claiming that they just offer what is essentially the same product under a different name, in broad terms they do offer many devout Muslims the chance to step onto the property ladder without compromising their religious beliefs. However, this peace of mind is likely to come at a higher price, as Islamic mortgages are more costly to administer than a normal mortgage.

For the banks, the development of Islamic Home Finance offers the chance to diversify into a new and booming market. There are 1.8 million Muslims living in Britain, and the UK Market for Islamic Mortgages is expected to reach £850mn this year.

For society at large, home finance plans do not have to be based on Islamic principles to benefit from the exemption from double stamp duty. Anyone who wishes to buy a home without paying interest can benefit from the tax reliefs introduced by the Finance Act 2003 and its successors.

Moreover, the development of Islamic finance also forges an unusual coalition – bringing Western Banks and the UK Government together with devout Muslims. Who knows but this might lead to a greater understanding and tolerance on either side?

Adela Read
Financial Journalist

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