Home truths for Islamic mortgages

They currently make up some £500 million of the £1.1-trillion UK mortgage market, so can Islamic home loans make a breakthrough? Christian Doherty investigates

In the wake of the sub-prime mortgage debacle, which precipitated the global financial crisis, hopeful homebuyers in the UK have found it difficult to borrow from chastened banks. Since then, the lessons learnt have led to greater interest in alternative ways of financing home ownership that doesn’t involve irresponsible lending and borrowers overloading themselves with debt.

Sharia-compliant mortgages have been touted by a number of Islamic banks as a more ethical, less-risky proposition for home purchases. Common forms of Islamic mortgages include ijara, in which a homebuyer pays rent until they purchase the property outright by a given period, and diminishing musharaka, which is an equity partnership where the homebuyer and mortgage-provider share ownership of the property until it is bought back in monthly instalments. Proponents say this leasing back form prevents the sort of debt spiral that plunged the global economies into recession.

But Islamic mortgages in the UK are facing challenges. Global banking titan HSBC was the main provider of UK Islamic mortgages through its Amanah arm. The bank, however, shuttered its Islamic bank in the UK as part of a global restructuring. Research firm Data Monitor estimates that HSBC Amanah accounted for 60 per cent of UK Islamic mortgages, leaving a vacuum in supply.

“Islamic banks in the UK are too small and they’re not operating on a level playing field when it comes to mortgage and other lending,” says Harris Irfan of Cordoba Capital. “They have FSA [Financial Services Authority] and Sharia regulations to contend with, and that does leave them at a disadvantage. But there’s a lack of awareness of how Islamic mortgages might offer an alternative way of getting home finance.”