A Sign of the Times

Minnesota has become the first state in which a public agency is offering “Muslim mortgages.” The issue arises because on a strict interpretation of Islam, Muslims are prohibited from either collecting or paying interest–a fact that tends to make home ownership difficult. The Associated Press reports:

For many Minnesota Muslims, it’s been virtually impossible to buy a home, because Islamic law forbids the paying or charging of interest. To help close the home ownership gap among Muslim immigrants, the state’s housing agency has launched a new program offering Islamic mortgages. …

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. The program is the brainchild of Hussein Samatar, director of the African Development Center in Minneapolis.

So the interest is included in the sale price and paid over time according to a standard amortization schedule, thereby allowing the home purchaser the fiction that he is not paying interest. What is striking to me is how easily this particular Koranic stricture can be rationalized and circumvented. No such painless solutions have been apparent in the controversies over handling of bacon by sales clerks, transporting of taxicab customers who are carrying alcohol, the need to leave assembly lines for periodic prayers, and so on. One wonders whether a different set of motives is at work in those cases.

UPDATE: A reader raises two interesting questions: will the individuals who buy houses with Muslim mortgages take a home interest deduction, or not? And will county assessors use the significantly inflated sale price as the valuation of the house for property tax purposes? Will they, for that matter, use the nominal sale price to increase valuations of neighboring houses, which would raise the taxes of the mortgagor’s neighbors? There may be some unconsidered pitfalls in the state’s participation in what could be considered a fraudulent transaction.

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