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Some Thoughts on Islamic Finance and the Mortgage Crisis

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mortgage_fee_2.jpgAs house foreclosures are on the rise, the gov-T is working on a bill to let the government back loans for at-risk borrowers. This has been born out of the subprime lending crisis. If you’re not sure what that means, basically, its when mortgage companies target people who do not have good credit for loans. It sounds strange, but in fact this is where many of them make the most profits as they gain the most interest revenue from it.

While I am glad the government is taking steps to help keep people from getting kicked out of their houses, I do not feel that this addresses any of the real fiscal issues facing society, namely that of fiscal responsibility and education. Instead of teaching people to purchase what they can afford, or passing laws preventing companies from preying on people they know will never be able to pay the loan back, they are simply helping the rich get richer.

The Washington Post had an article entitled A Higher Law for Lending that sheds light on how Islamic finance companies have faired in this latest crisis. Since they do not have variable interest built into their contracts, they have been unaffected by this debacle.

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Whether or not we all agree 100% with the schemes or set up of some of these finance companies, it is important to at least acknowledge that in the grand scheme of things Muslims are contributing to the solution of societal issues that are of immediate concern to the general populace. There’s a lot of work to be done in this field still, but I believe this is a huge step forward for us as a community.

Another thing that comes to mind from this is that it is a proof in front of our very eyes that Allah (swt) has made the good things lawful, and the bad things unlawful. I cannot count the number of people I have met who think buying a house with a traditional mortgage is ok or ‘necessity’ and that it is just something we do since we live here. But this shows us, that no matter how easy it is, or what assurances we may get from the bank about these schemes, in the long run they can do far more harm to people than good (and that is speaking strictly in the worldly sense). How many people are losing thier homes, savings, and the “dream” that they have been planning for their entire lives?

It really is a time to reflect on the benefits of having taqwa in Allah. As we know, He will provide for us from sources we could never imagine if we simply uphold our duty to Him and rely on Him alone. This should also give us some added motivation to continue our progress as an ummah, not just in the financial sector, but other sectors of society as well. The same way we can show that Islamic finance is in fact better for the economy (even with the ‘capitalist’ system in place here), we need to show the world how our family and social structures can help benefit those around us – be a part of the solution to the problems our society here at large is facing.

Lastly, this is an old article from the Baltimore Chronicle in March, but I have been wanting to highlight it for a while. It basically shows how the public take down of Eliot Spitzer was linked to his fight against sub-prime lending. This article is a must read, and I have quoted a few passages below.

This week, Bernanke’s Fed, for the first time in its history, loaned a selected coterie of banks one-fifth of a trillion dollars to guarantee these banks’ mortgage-backed junk bonds. The deluge of public loot was an eye-popping windfall to the very banking predators who have brought two million families to the brink of foreclosure.

Up until Wednesday, there was one single, lonely politician who stood in the way of this creepy little assignation at the bankers’ bordello: Eliot Spitzer.

Who are they kidding? Spitzer’s lynching and the bankers’ enriching are intimately tied.

How? Follow the money.

….

Now, what kind of American is ‘sub-prime’? Guess. No peeking. Here’s a hint: 73% of HIGH INCOME Black and Hispanic borrowers were given sub-prime loans versus 17% of similar-income Whites.

….

Instead of regulating the banks that had run amok, Bush’s regulators went on the warpath against Spitzer and states attempting to stop predatory practices. Making an unprecedented use of the legal power of “federal pre-emption,” Bush-bots ordered the states to NOT enforce their consumer protection laws.

Indeed, the feds actually filed a lawsuit to block Spitzer’s investigation of ugly racial mortgage steering. Bush’s banking buddies were especially steamed that Spitzer hammered bank practices across the nation using New York State laws.

….

When the housing bubble burst and the paint flaked off, investors were left with the poop and the bankers were left with bonuses. Countrywide’s top man, Angelo Mozilo, will ‘earn’ a $77 million buy-out bonus this year on top of the $656 million – over half a billion dollars – he pulled in from 1998 through 2007.

….

Then, on Wednesday of this week, the unthinkable happened. Carlyle Capital went bankrupt. Who? That’s Carlyle as in Carlyle Group. James Baker, Senior Counsel. Notable partners, former and past: George Bush, the Bin Laden family and more dictators, potentates, pirates and presidents than you can count.

The Fed had to act. Bernanke opened the vault and dumped $200 billion on the poor little suffering bankers. They got the public treasure – and got to keep the Grinnings’ house. There was no ‘quid’ of a foreclosure moratorium for the ‘pro quo’ of public bail-out. Not one family was saved – but not one banker was left behind.

Every mortgage sharking operation shot up in value. Mozilo’s Countrywide stock rose 17% in one day. The Citi sheiks saw their company’s stock rise $10 billion in an afternoon.

And that very same day the bail-out was decided – what a coinkydink! – the man called, ‘The Sheriff of Wall Street’ was cuffed. Spitzer was silenced.

Please also see, Muslim’s Guide to Debt and Money Management:

Intro | Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part 6

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Omar Usman is a founding member of MuslimMatters and Qalam Institute. He teaches Islamic seminars across the US including Khateeb Workshop and Fiqh of Social Media. He has served in varying administrative capacities for multiple national and local Islamic organizations. You can follow his work at ibnabeeomar.com.

8 Comments

8 Comments

  1. MR

    May 20, 2008 at 9:05 PM

    Muslims must save. BY ALL MEANS NECESSARY!

  2. j

    May 21, 2008 at 4:56 AM

    Good article, however it (like the WaPo article) concentrated on the current woes of the mortgage crisis and not the ways in which Islamic finance was able to avoid them.
    With most of the Islamic mortgages almost mimicking verbatim conventional schemes (as pointed out by Dr. El-Gamal in the article) there does not seem to be a real difference between the two schemes that would attribute avoiding being hit by the mortgage crisis. True islamic contracts don’t have variable interest rates, but it would be interesting to know the fluctuation of those rate for conventional mortgages, as Islamic ones are generally higher than conventional mortgages to begin with. If the peak of fluctuation reaches the pre-crisis islamic rate or slightly above, there really is no difference.

    What would the real differences be? The only thing that I can think would account for this is that:
    1- Islamic mortgages are a small niche market and are functioning in only a portion of the US, particularly places that have not seen the down side of the recession as hard as others.
    2- Islamic Mortgage companies are relatively very conservative in their selection and pre-qualification criteria, something that most other Mortgage companies had become extremely lax on (to the point of offering no money down to people with literally no money).

    If this is the case then the difference is not really in the fact that they are “Islamic” but that they chose to follow stricter self-regulation than other companies. How do Islamic mortgages fair against those companies that did not go lax in offering mortgages? With their generally higher interest rates and small number of middle to lower class mortgagees it is hard to determine.

  3. reader

    May 21, 2008 at 5:18 PM

    I hope that was a joke MR… there is a lot to be said about hoarding wealth when out brethren are suffering poverty, disease, and oppression. The sahabah, the weatlhy and the poor, in good times and in bad, spent their money and used to compete in spending for the sake of Allah SWT.
    If we stop treating money as the life giver, it will stop taking our lives.

  4. Pingback: politics world » Israeli Soldiers (IDF) Photograph Dead as Trophies - Oznik

  5. Pingback: Pay Off Your Debt - Khutbah by Muhammad Faqih | MuslimMatters.org

  6. ribh

    May 30, 2008 at 7:12 PM

    RIBH, the Islamic Finance News Portal ( http://ribh.wordpress.com ) provides daily updated information to the general public as well as to the professionals interested by the development of Sharia Compliant financial services.

  7. Pingback: Some Thoughts on Islamic Finance and the Mortgage Crisis « RIBH, Islamic Finance News

  8. Halal Mortgages

    January 24, 2009 at 4:55 PM

    I think the UK public are more aware of shairiah compliant financing and this itself has led to the increase in products in services. Insha Allah this will continue to grow and expand and give us muslims better value products without losing the Islamic perspective.

    Halal Mortages are getting more and more competative as the competition grows.

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