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.
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