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Islamic mortgage lender in Canada fails

Bankruptcy opens legal can of worms


 

UM Financial Inc, a small Islamic mortgage lender, went into receivership back in October, but the consequences of the bankruptcy are emerging only now, Reuters reports. Not only does the case risk giving a bad name to sharia-compliant finance (and especially small Islamic funds with little oversight) in North America, it also poses a series of legal hurdles that could lead to mortgage holders to losing their homes. Since the use of interest is forbidden in Islam, sharia-compliant mortgages are set up so that lender and homebuyer share the costs of purchasing a home. Rather than paying interest, homeowners rent the property from the lender while gradually purchasing the outstanding share of their house. Ownership is transferred to the homeowner only when the full value of the house is paid. That, though, makes it difficult to asses who ultimately owns a house in case of a bankruptcy.

Reuters


 
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Islamic mortgage lender in Canada fails

  1. Sounds to me like it would be ridiculously easy to figure out who owns the house.  You’ve purchased more than 50% of the shares?  You own it, but you will need to buy the other shares from the creditors.  You own less than 50%?  So sad, hopefully when the creditors sell your house, you will get a good return per share you own.

    • That’s only simple if the deal was structured that way, and its hard to tell from this short description whether that was the case. The description that the buyer is paying rent, suggests they are not the owner – why pay rent on a house you own? Of course, in this case the “rent” is really interest by another name, but whatever. 

      • Sorry, I was replying a bit tongue-in-cheek to the fact that the article used such simplistic (brief) wording to describe the deal they then go on to say is complicated.  Following through the information given, there is nothing complicated at all.  I grant you the reality may be complicated.  :)

  2. The prohibition against interest existed in Christendom.  Since then we’ve evolved to differentiate between reasonable interest charges and usury (which is what the actual prohibition is).  The Muslim world has not.  As a result, there is no concept of a credit market.  All lending is essentially collateral lending.  And this is exactly why banking in the Middle East will never really take off.  Nor will real prosperity take root, because there’s no easy mechanism to buy a home.

    • There has to be a happy medium in here!  Christendom seems to think “reasonable” is 28% (and the law says 60% ?!?!) while Bank of Canada rate is 1%.  But I do see that prudent borrowing at *real* reasonable rates for things such as a home makes sense.

    • Well that is obviously evident from the economic fiasco is US ;)

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