Regulation comes to Islamic mortgages

Thursday, 05 April 2007 12:00

From tomorrow (April 6th) people taking out Islamic mortgages will gain official protection from the Financial Services Authority (FSA).

Under Sharia, or Islamic, law Muslims are forbidden to pay or receive interest, excluding them from the majority of financial products.

With Muslim or Islamic mortgages, banks buy the home on behalf of a client - contributing up to 90 per cent of the purchase price. The customer then pays the remaining percentage upfront (like a deposit) and repays the outstanding amount over an agreed term, together with a rental payment.

But this system, while it has helped Muslims buy homes, escaped traditional mortgage regulation.

This meant people taking out Islamic mortgages were not protected from dodgy sales practices and had no automatic right to compensation if they were mis-sold products.

However, from tomorrow firms offering Islamic mortgages must:

• Be fit and proper and appropriately resourced with staff competent to undertake this business
  
• Consumers should get clear, concise and consistent information about a firm's services and products on offer (including appropriate risk warnings) so they can make informed choices
  
• Consumers should get good quality advice and be sold suitable products which take account of their circumstances and needs, and
  
• If things go wrong, consumers are able to obtain redress, if appropriate.

"Regulation of these products represents an important step in the regulation of housing finance," said Dan Waters, director of retail policy at FSA.

"It . . . builds on the work we have already done to improve consumer access to Islamic financial services. We are also working to promote wider public understanding of . . . these products as part of our consumer education objective."

The new rules apply to the ijara and the diminishing musharaka methods of Islamic mortgage. The other way of buying a home acceptable under Islamic law is the murabaha, which has been regulated since October 2004 under the mortgage regime.

• Tags:
• islamic mortgage
,
• muslim mortgage
,
• news