U.S. Banks expand to serve Muslim community (1 Viewer)

[BryanZ]

http://www.planetrealtor.com/florida...le=n4-01262006

U.S. Banks expand to serve Muslim community

WASHINGTON -- Jan. 26, 2006 -- As the U.S. Muslim population grows -- some studies put it as high as 7 million -- the financial services industry is offering more mortgage and other financial instruments that accommodate Islamic law, which forbids Muslims from paying or earning interest.

The largest mortgage company in the country to serve Muslims last year, Guidance Financial Group, based in Reston, Va., announced in mid-2005 that it had provided more than $500 million in home-financing contracts. The company operates in 17 states and Washington, D.C.

The most common Islamic-compliant mortgage deal is called a murabaha transaction. The bank buys a property with its own funds, and then sells it to a customer under an installment-repayment plan. The buyer gets title to the property immediately after closing on the agreement.

"It's roughly the equivalent of a 30-year mortgage, but you're not repaying us principal and interest," says David Loundy, corporate counsel for Chicago-based Devon Bank, which also serves the Muslim community. "You're simply paying us part of an installment sale."

The IRS hasn’t resolved whether Muslim taxpayers can claim an interest deduction on their mortgages when they aren’t technically paying interest.

Source: The Washington Verdana,Arial, Tom Ramstack (01/23/06)

© Copyright 2006 INFORMATION, INC. Bethesda, MD (301) 215-4688

Sometimes information needs to get out there, for better or for worse. Here are my brief thoughts:

1. If word of this gets around one would expect a sudden increase in the number of Muslims in the US. Who wouldn't want to make extremely low payments on a $250,000 home? Assuming the banks charge a mere 10% for the entire loan, you would have payments equal or less than roughly $765 a month for 30 years. ($250,000 x 1.1 [simplely the original loan of $250,000 plus $25,000 interest for the bank has to make some money] = $275,000 / 30 = $9,166.67 a year / 12 = $763.89 a month) Pretty attractive, in my opinion.

2. How would the banks and IRS know the people were truly Muslim rather than faking it for the fantastic deal? Dishonesty would be very prevelant.

3. What are the unintended consequences of this action? In other words, isn't this discrimination against everyone who isn't a Muslim? After all, if you offer one group that deal then you better offer it to everyone else. Along those same lines, what about those Muslims who got loans in years past and had a high interest rate? Woudl they get reimbursed?

These are only questions of which I do not have the answer to but, perhaps, someone else does.

 

[Dennis*G]

Wow, where do I sign up??

I would hope the IRS does not give them any tax breaks for these "loans"

If they do, I am seriously looking at switiching religions.

 

[Denward]

I think you're making a HUGE assumption about the 10% for the entire loan. The bank says it's roughly equivalent to a 30 year mortgage so I don't think anyone's getting a deal here. I think payments are going to be calculated to be the about the same. I'm sure the banks don't want to be seen as favoring or gouging Muslims.

As the article implies, any Muslim who enters a murabaha is risking the mortgage interest deduction that the rest of us are entitled to. That's for the IRS to decide. If Muslims don't get the deduction, then that's the price they pay for adhering to their faith. I wouldn't expect the bank to make the loan on an equivalent after-tax basis because that's reducing the bank's profit. If anything the bank might charge somewhat more since the client gets title to the property immediately upon closing.

 

[Chu Gai]

If the bank buys it with 'its own funds' and those funds are borrowed from other institutions, then the bank may calculate the repayment based upon such things as the cost associated with the borrowing. IOW, the net effect might be the same. It'll be interesting to see though how this plays out.

 

[DaveF]

As others ask, why do you assume this is a "fantastic deal"? I'd expect a bank would roll up the total cost of a 30-year, fixed-rate mortgage and then sell it to the applicant for that cost, spread over 30 years.

That is, a $250k house at 6% for 30 years comes to about $1000/mo in principal and interest. The hypothetical Muslim homeowner would make those payments, whittling away at the total amount owed. In the end, at best, they would pay the same as any other buyer. But perhaps with no interest deduction on their taxes.

 

[SteveA]

What happens if a muslim sells a house after just a couple of years? Does the entire 30-year balance become due at that time, or is the payoff amount adjusted accordingly?

 

[andrew markworthy]

We've had these in the UK for years. A muslim friend of mine has one and she says that to all practical purposes they work just like a normal mortgage.

 

[Chris Lockwood]

It sounds to me like they're just playing word games.

If a house costs $200,000, they pay more than that over the years, right? Call it what you want, but I'd call the amount above $200,000 interest.

It's like calling a tax a "user fee".

I can't wait to read about the special arrangements the Saudi banks have for non-Muslims.

 

[andrew markworthy]

And the award for cross-cultural sensitivity goes to ...

The point is that they don't need 'special arrangements'.

 

[Chris Lockwood]

> And the award for cross-cultural sensitivity goes to ...

The Saudis?


> The point is that they don't need 'special arrangements'.

No, just a plan that had to be invented to comply with their beliefs.

Sounds like a 'special arrangement' to me.

I didn't say anything was wrong with it, just that it's really just a word game.

 

[andrew markworthy]

Please, I beg you - spend some time reading up about the muslim world.

 

[Lew Crippen]

If I am not mistaken, the major force behind Muslim banking is in Kuala Lumpur (Malaysia). And there are plenty of banks there that serve the minority non-Muslim population.

Further, the largest Muslim country in the world, Indonesia, has many, many banks serving non-Muslims. Actually most banks serve both (IIRC),