Some time ago, before I became more aware of the realities of this world, I listened to claims in support of Islamic financial principles and thought I might like to try it for myself. Ethical, transparent and honest financial dealings appeal to me. I thought I’d give it a shot. I spoke to an adviser from a company offering Islamic mortgages. I was looking to replace a repayment loan with one of the UK’s major mortgage providers.

Bear in mind that the underlying principle behind Islamic banking is that it complies with Sharia Law – the main tenet of which, relating to finance and money, is that usury is outlawed. Just in case you don’t have dictionary handy, I’ve included this definition:

u·su·ry
(y zh -r )

n.
pl. u·su·ries

1. The practice of lending money and charging the borrower interest, especially at an exorbitant or illegally high rate.

2. An excessive or illegally high rate of interest charged on borrowed money.

3. Archaic Interest charged or paid on a loan.

I was keen to understand the differences between the usury based western transaction (ie borrowed money is paid back with interest added on top), and that on offer through enlightened Islamic banking.

The literature sent to me after my initial discussion explained that instead of lending me the money and then charging me interest (at that time around 6% including the repayment of the capital sum on a standard variable rate), the bank would own the property instead of me.

What I would contract to do would be to pay rent to the bank for a set number of years until I had paid back the money they had outlaid. It seemed very simple and open. However, something niggled and tugged at my mind. For the life of me I couldn’t make out where the bank would make its profit. It is after all, in business to make money to pay its own bills and staff costs.

I rang and asked the advisor I had spoken to initially. I pressed him on how it worked. He confirmed that the bank would own the property until I had paid 25 years of rent back to them. I scratched my head and then it came to me. I asked how much that rent would be. I waited for him to work it out. When he gave me the answer I asked how the figure had been arrived at and was it fixed for the whole period of the mortgage.

His reply was that the rental was worked on a calculation based upon a percentage of the total loan (see where I’m going with this?) and that the rent was going to be about 6% of the total loan plus
a bit of capital repayment and also, that that amount might fluctuate in future.

It seems Islamic principles are nought but smoke and mirrors.