Globalisation of Islamic Mortgages

The underlying principles in Islamic finance have remained unchanged historically since their development over 1,400 years ago.

Modern Islamic finance emerged in the mid-1970s with the founding of the first large Islamic banks. Development initially occurred through marketing of a steadily expanding supply of Shariah compliant financial instruments. This supply-driven model contributed to relatively slow growth until the mid-1990s.  Rising awareness and demand for Islamic products, along with supportive government policies and growing sophistication of financial institutions, have together raised the presence of Islamic finance globally.

Islamic finance a global player

The global market for Islamic financial services, as measured by shariah compliant assets, is estimated by IFSL to have reached $951bn at end-2008, 25% up from $758bn in 2007 and three quarters up on the 2006 total (Chart 1).  Commercial banks account for the bulk of the assets with investment banks, sukuk issues, funds and takaful making up the balance   Key centres are concentrated in Malaysia and the Middle East including Iran, Saudi Arabia, Malaysia, Kuwait, UAE and Bahrain (Chart 2). Islamic finance is also developing in Asian countries such as Bangladesh, Pakistan and Indonesia, as well as North African countries such as Sudan and Egypt.  The leading western country is the UK (who is now ranked 8th in the world for Islamic Finance) whilst in other western countries the take up is smaller but a number of countries, particularly France, are looking to develop a bigger presence in Islamic finance.

While the Islamic finance industry initially has been less affected by the financial crisis and global economic downturn, there are ongoing challenges, particularly for the sukuk market and for some Islamic banks; they are being tested by its ability to deal with several defaults. A $10bn loan by Abu Dhabi staved off the threat of a potential default by Dubai World on its repayment on the Nakheel $4bn sukuk in December 2009.  Revenue and profitability has suffered in both 2008 and 2009 and liquidity is a significant restraint for some banks.

Broadening geographical customer base for Islamic mortgages

The market is currently most developed in Malaysia, Iran and the majority of countries that form the Gulf Co-operation Council (GCC). However, Islamic mortgages are moving beyond its historic boundaries in these countries into new territories. 

Markets where Islamic mortgages are developing include North Africa such as Turkey, Sudan, Egypt, Jordan and Syria.  Other Asian countries such as Indonesia, which has the largest indigenous Muslim population in the world, as well as Bangladesh and Pakistan.  Western countries in Europe and North America; countries such as the US, Canada and France.

The global development of Islamic mortgages requires that further progress is made in addressing a number of barriers. These may include shariah approval, taxation, regulation, standardisation, awareness and expertise.

Can Saudi mortgage law become a potential model for GCC?

Why is it so? This is because the Saudi mortgage law will reflect the Islamic mortgage in true terms. Moreover, Saudi Arabia is entering into the mortgage market after all the other Gulf countries therefore Saudi Arabia will come up with a mortgage law that will be the best as they have a know how about the mistakes made by other GCC countries previously and they will have a better understanding of the problems faced by the others.

When a country develops a mortgage law its basic target is to make the mortgage market lucrative and to reduce the defaults.   The most lucrative market of the entire region as it is the largest economy of Middle East.   In addition, the regulations related to risk management, corporate governance and competition are crucial for the sustainable growth.

Islamic mortgage system introduced for Muslims in Canada

At a time when failed mortgages have led to collapse of major banks and foreclosure of millions of homes in the US, a credit union in Canada has introduced Islamic mortgages for Muslims.  The Assiniboine Credit Union (ACU), based in the city of Winnipeg, has launched what it calls the Islamic Mortgage Programme to help devout Muslims fulfil their dream of owning a home. Following strict Islamic laws which condemn interest on loans as usury, the credit union will not charge any interest from the borrowers.

Of about one million Muslims in Canada, 13,000 live in Winnipeg which is the capital of Manitoba province.  The Islamic Mortgage Programme assumes significance as the community is set to triple in population in the next two decades. The Islamic Mortgage Programme is the first such step under Muslim laws in Canada.

This financing arrangement a 'Declining Partnership Agreement' and it is based on the Islamic shared ownership concept called 'musharaka'.  In the context of musharaka, the Muslim family and ACU will each contribute to the purchase of a home and each has an ownership share in the property. The family enters into a contract with ACU to purchase ACU's ownership share over an agreed-upon period of time. During this time, the family has exclusive rights to live in the home and in exchange they agree to pay ACU a profit. At the end of the contract the Muslim family is the sole owner of the home.

Is the Islamic Mortgage market in the UK dying a slow death?Global BrandNusrat Janjua
Marketing Director