Seattle Moves To Make Available “Sharia Mortgages” To Conform Mortgages To Islamic Law

262px-Flag_of_Seattle.svgIn a controversial move, Seattle is pushing to establish new financing packages that conform with Sharia law to allow greater homeownership among Muslims. Islam prohibits the payment of interest and some Muslims are therefore unable to buy homes under standard mortgage agreements. The most for more inclusive options has led to a backlash by critics who charge that it could be a new avenue for terrorist financing or constitute special treatment for one religion.

This is not the first time that this controversy has arisen. In 2008, Rep. Frank Wolf, R-Va., and then-Rep. Sue Myrick, R-N.C., sent AIG then-Chairman Edward Liddy a letter condemning the company’s move to offer Sharia-compliant insurance programs:

“You may defend your decision to offer Sharia products and will probably state that they have no real ties to Sharia law, and therefore pose no threat. You are wrong. Like Britain, the way to America’s legal code is through its wallet, and if Sharia law gains a strong footing in the United States, it will be through Sharia finance and Sharia products.”

There was even a lawsuit brought by The Thomas More Law Center against then-Treasury Secretary Henry Paulson and the Federal Reserve in 2008 over AIG’s actions. It was an extremely weak lawsuit that predictably failed.

I fail to see the serious threat of terrorist financing or operations due to the availability of Sharia-compliant mortgages. Indeed, I am surprised that the market did not already move to accommodate such demands from customers. Likewise, I would expect to see different types of packages offered as an accommodation for different religious values.

What I find fascinating is the rather artificial way of avoiding the Sharia prohibition that seems entirely acceptable by the Islamic community. All the banks do is take the interest and add that figure to the cost of the loan as “profit.” Thus the bank holds the property until payment of an agreed-upon price that includes “profit.” The sale price is made in installments with the monthly rate set . . . you guessed it . . . on the projected interest rates. Despite the transparent use of interest under another name, that seems to satisfy Sharia law.

As always, my inclination is to leave such matters to the market. So long as there is no discrimination or favoritism given on rates or “profits”, I fail to see the basis for governmental intervention to stop it.

What do you think?

111 thoughts on “Seattle Moves To Make Available “Sharia Mortgages” To Conform Mortgages To Islamic Law”

  1. There’s a lot of idiotic raving about disparate impact in this thread. It appears to be another name for indirect discrimination. Such legal principles are applied routinely in employment law and the like in many countries. They don’t have the crazy effects predicted here.

  2. How Muslims have historically gotten around the prohibition on interest is pooling family money to buy property interest-free, or saving up to buy a home.

    I can see why the faith discourages going into debt. Our debt-based society does have its negative consequences. But a total prohibition does not take into account how we can no longer just clear our own land, build a home with our own two hands, and start raising goats.

  3. Thank you Rick for getting the gist of my wordy posts.

    I do not think we should ever have disparate treatment or discrimination. However, the Supreme Court’s unfathomable ruling on disparate impact or outcomes is going to create chaos.

    The offering, by the same institution/bank of Sharia loans and normal loans is absolutely a disparate treatment and it creates a disparate outcome/impact.

    As I said, the Supremes created a big mess with this ruling.

  4. This seems like an artificial loophole around the prohibition against interest. The “profit” is interest, and I assume the mortgage would contain an APR, TIL, and other documentation of the cost of the loan which would include interest, even if they renamed it “profit.”

    The banks are just trying to expand their market share by coming up with this new trick to get customers. I think it’s just a loophole that is not in the spirit of the faith. Catholics also create compacted loopholes around the divorce prohibition. That’s how someone can be married for 10 years with kids and still somehow get their marriage annulled in the eyes of the Church.

    Banks don’t turn down mortgage applicants on the basis of religion. If a religion opposes interest they simply cannot take out a loan. And I think playing with semantics is cheating. Banks have made adjustments to lending to the Amish, who are a banker’s dream. They’ll walk over broken glass barefoot rather than make a late payment. But since they do not believe in instant gratification debt over buying a bunch of junk, they tend not to have a long credit history. But they are statistically a very safe risk, and that is what credit scores are supposed to measure: risk to the lender.

    What we can learn about how the Amish handle money:

    Craker said Amish would be “standing on their heads” before failing to repay a debt on time.

    “The Amish are an extremely good risk,” Craker said. “I think bankers look at them and just cry for joy because it’s such a sure bet.”

  5. The “can of worms” was opened with Hobby Lobby and Conestoga. Businesses that can circumvent laws by claiming a religious exception for themselves or their customers, well that’s what was you conservatives wanted, now it looks like that’s what you’re going to get. Just because it’s Muslims wanting the special treatment, some conservatives are against it. Not surprising.

  6. “I have NOWHERE stated that belief. You obviously do not understand a word that I have said.”

    This is manifestly true. You ahead to be making some obscure objection to a perfectly serviceable class of financial instrument which, to the best of my knowledge, is in daily operation in practically every country in the world. The problem isn’t just that I don’t understand your argument. I can’t even work up enough interest to wonder why you would set out on such a futile task.

  7. Here is an excerpt from a proposal by the office of Seattle Mayor Ed Murray.

    Support the Community in Finding Housing Tools for Sharia-Compliant Lending: For our low – and moderate – income Muslim neighbors who follow Sharia law – which prohibits the payment of interest or fees for loans of money – there are limited options for financing a home. Some Muslims are unable to use conventional mortgage products due to religious convictions. The City will convene lenders, housing nonprofits and community leaders to explore the best options for increasing access to Sharia-compliant loan products to help these residents become homeowners in Seattle.


  8. Under the Supreme Court’s latest ruling we are not allowed Disparate Treatment and not even allowed to have Disparate Outcomes ….even IF the treatments are equal. What a can of worms.

    Right, disparate impact effectively outlaws everything. According to current analysis banks are discriminating because a disproportionately small number of Muslims receive mortgages. But if you offer a Muslim compliant mortgage you’re guilty of discriminating by offering different loans based on religion. Even if you make this generally available (not exclusively available to Muslims) there will still be a disproportionate number of Muslims accepting it. So disparate impact is still violated.

    Somehow those who push disparate impact don’t see this as a problem, but a feature.

  9. The one thing I’d object to here is your apparent belief that banks in America are allowed to refuse certain loans to certain customers on the basis of religion

    I have NOWHERE stated that belief. You obviously do not understand a word that I have said.

    Banks are not legally allowed, as yet, to make separate or different loans for customers based on religion, race, gender etc.. As Darren pointed out. The Banking rules are not set by local authorities. Unless they have changed Federal or State Banking regulations, Banks are to make loans subject to the same rules for everyone who applies.

    Muslims are not turned down for loans, they are just offered the same deal as everyone else. If they don’t like it…tough sh*t. They can go to a Muslim operated PRIVATE Bank that is not subject to the rules that regulate everyone else.

    What they are asking for is special treatment and special laws just for themselves.

    Under the Supreme Court’s latest ruling we are not allowed Disparate Treatment and not even allowed to have Disparate Outcomes ….even IF the treatments are equal. What a can of worms.

  10. Rick you write: “The statement is that banks are not required to change the terms of their lending in order to appeal to a specific religious group.”

    Yes, this is true. And if it’s what Dust Bunny Queen meant I apologise, though I’ve no idea to what end they would state such a truism.

  11. Rick

    You quoted Darren Smith:

    “Municipalities should not engage in establishing lending or banking regulations.”

    Then you asked “Is this what’s happening? ”

    The answer is “no”.

  12. The one thing I’d object to here is your apparent belief that banks in America are allowed to refuse certain loans to certain customers on the basis of religion. I pointed out earlier that this would be against the Civil Rights Act.

    This is not a correct interpretation of fact. The statement is that banks are not required to change the terms of their lending in order to appeal to a specific religious group.

  13. Dust Bunny Queen I think you’ve just pointed out that different financial products may have widely different efficiency for certain uses. That’s absolutely true. It’s how markets work. As the customer you have to choose which product you think is more suitable for you.

    The one thing I’d object to here is your apparent belief that banks in America are allowed to refuse certain loans to certain customers on the basis of religion. I pointed out earlier that this would be against the Civil Rights Act.

  14. As a former financial planner and advisor/ I would advise my clients to remove their deposits from any Bank that is taking on Sharia compliant mortgage or auto lending as described in the Seattle article.

    Not only are the banks taking the risk of default and being left holding the bag/house/car, they are also assuming the risk of falling values.

    The bank buys a house for $500K and sells it to the Muslim under Sharia Law. The Bank owns the house and is slowly transferring the value of the home to the borrower by monthly payments.

    What happens to the Bank, and my depositor clients when the bottom falls out of the real estate market….again…..and the borrower decides to walk away from the loan? The Bank may have recourse to go after the Muslim borrower……maybe. Now the Bank will now own a portfolio of OREO property that is worth less than it was when it was bought. Instead of the Borrower the Bank is taking ALL the risk.

    Geez, I can’t imagine the mess on the derivative markets with Sharia Loans in the CMO’s. Can you even package a liability into a bond like this? I don’t think so. Assets are the basis of CMO’s The ASSET is the money owed on the mortgage as well as the interest/profit that is expected

    The bank is taking ALL the risk for not much reward.

    “Mr. Client. This has nothing to do with religion or with Sharia Laws. I’m concerned for your financial safety and believe that these practices are exposing you and your assets to more risk that you should be considering. In addition if you are thinking about purchasing a Collateralized Mortgage Obligation bond, I would insist that we delve deeply to see what percentage of the investment consists of Sharia (if possible) and substandard mortgages and decide if this is a good investment for you given your risk tolerance. We will need to also look at the tranche that the CMO is in so that if there are defaults you are not last in line to get paid.”

  15. Dust Bunny Queen “I would be upset if I were forced to accept a Sharia compliant loan.”

    Of course you would, and rightly so. But you won’t be.

  16. From an article about the Seattle idea.

    Here’s how a Sharia-compliant sale might work between a bank and a Muslim homebuyer: The bank agrees to buy and hold clear title to the house, then enters into a contract to sell the house at an agreed-upon mark-up price that includes profit. The buyer agrees to pay the sale price in installments, or one lump sum. The markup rate is calculated to compete with prevailing interest rates, so the buyer’s monthly payment is roughly equal to what a traditional lender might charge for a loan that combines principle and interest.

    The lending capacity of the Bank is based on the amount of deposits it holds (in a very simple analogy it is really more complicated than that).The Bank’s deposits do not belong to the bank. They belong to the depositors who can ask for their money back at anytime…..well until we turn into Greece or Cyprus and then you will be lucky to get your money……that is why they are called, Demand Deposits [checking and savings]and are considered a bank liability. Money OWED to be paid out. Accounts payable

    There are also Time Deposits, like CD that are only available to the depositor at the end of a time, or with an early withdrawal penatly.

    Loans are assets to a bank. Money to be RECEIVED. Accounts receivable. The loan on tangible assets are also secured not just by the value of the asset, the loan, but also by the underlying collateral, the physical property [car, house, inventory]. The security on this collateral is an Insurance policy. So that if, the asset/house burns to the ground the bank AND the depositors whose funds are used to determine how much.

    Interest on loans is Income to the bank.

    Bank accounting is completely opposite of what normal people consider when they balance their personal financial accounts. Back@ssward 🙂

    If the bank is using the liabilities of the bank to purchase homes, which are also now liabilities, because they traded cash one liability for another that they OWE to the new owner, even though it is in small increments, they must come up with a way to protect the collateral and protect the assets of the depositors. Double entry bookkeeping 101

    Insurance. Who is going to buy the insurance. Howe are they going to protect the collateral and repay the depositors/bank if there is a disaster.

    Do Muslims participate in the FDIC program when they put money into Bank of America. That IS insurance.

    What a freaking mess.

    If Muslims want Sharia Loans, then they should start their OWN lending institutions and do private loans.

  17. Darren Smith

    Municipalities should not engage in establishing lending or banking regulations.

    Is this what’s happening? There’s no link so I interpreted “pushing to establish” as some Muslim outreach group presenting a draft document or a list of changes necessary to financial institutions, but that those institutions using them is voluntary.

  18. Municipalities should not engage in establishing lending or banking regulations. That is the purview of state or federal government.

  19. I suspect the details include a similar word game granting a non-interest discount for early payments. The whole thing seems clearly cosmetic.


    You are likely correct. However, how to calculate this so that the early payments would be equally applied and not create an advantage to the Sharia Loan over a standard early payment would again fall into the Disparate Outcome/Disparate Impact issue.

    How do you create equality when you have separate financial and actuarial systems for people based on their religion?

    The Supreme Court really stepped into this when they made this outcome of events a civil rights issue.

  20. Lets try this for Tony

    You want to buy a car for 35,000 at 8% interest. Your payment is $613.66 because that includes interest and principle for 72 months of payments. And a total cost for the car of $44,183.77

    Payment Every Month $613.66
    Total of 72 Payments $44,183.77
    Total Interest $9,183.77

    Your Muslim neighbor wants to buy the same car. Assuming the Dealer puts the same amount of total interest on the loan, then his payment for 72 months would be $613.66.

    Except his payment doesn’t include that nasty interest. But the loan is the same $44,183.77

    The dealer makes the same profit on both loans.

    The same. That sounds fair right?

    However, if the dealer decides to make a profit of $6000 on the Sharia loan and you continue to make the monthly payments,because you aren’t smart enough to figure it out that if you pay more, you pay less or because you just can’t pay anymore monthly. THEN this would constitute a Disparate Outcome because your Muslim neighbor will end up paying less for the same vehicle because he got Disparate Treatment by basis of his religion.

    I know…..whistling in the wind.

    However, let’s suppose you ARE actually smart or have the ability to pay more. And assume you and your Muslim neighbor have the same loan as in the example above…….if you have the nasty principle plus interest loan, you can save a lot of money by merely paying more or more often than once a month.

    {words and numbers bouncing off of a brick wall}

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