Wednesday, March 04, 2009

Making Islamic finance transparent

Minnesota Public Radio
Here's how the mortgage, known as Murabaha financing or "cost plus sale," works:

The state buys a home and resells it to the buyer at a higher price. The down payment and monthly installments are agreed to up front at current mortgage rates.

The deal is identical to a thirty-year fixed-rate loan, except there's no additional interest, because the higher up front price factors in payments that would have been made over the life of a traditional mortgage.

A handful of private banks and lending institutions offer Islamic mortgages in the U.S., but Minnesota Housing is the first state agency to offer such a product.
In the U.S. mortgage interest is tax deductible -- it can be used to reduce the tax you owe on your income tax. I wonder if the home buyer taking an Islamic mortgage will still be able to take this deduction. Because otherwise these mortgages are mathematically equivalent, economically equivalent to a conventional fixed interest mortgage. It is only in the mind of the borrower that they appropriate for a devote Muslim whereas a conventional fixed interest mortgage is not.

To me an Islamic mortgage would be one where the buyer and the lender shared the profit (or loss) of any eventual sale of the property.



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