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Friday, 6 July 2007

New Zealand firms work to offer 1st Islamic mortgage

For years, businessman Abdullahi Dayib, a Muslim, has wanted to buy his own home and expand his small-scale export-import business in New Zealand’s northern city of Hamilton. But he hasn’t been able to raise funds because his religion bars conventional borrowing. So in February, the Somali-born Dayib set up his own company, Al-Haramain Islamic Finance, which will offer the country’s first Islamic mortgage product along with a handful of other New Zealand firms. “We (Muslims) have a lot of banks willing to lend money but we can’t just go into banks and borrow,” said Dayib, a New Zealand citizen. Shariah, or Islamic law, deems the payment or receipt of interest akin to usury, so Muslims eschew standard loans. Dayib is now waiting for the mortgage product to be approved by Islamic clerics so he can start offering it to the country’s 36,000 Muslims who, he says, have been held back by their inability to raise cash like other New Zealanders. “I know how difficult it is to get funding that is interest free and on Islamic principals – that is what made me set up the firm,” he said. “Once we set everything right, I’ll be the first person to get a mortgage.” Islamic financing has spread swiftly across the globe, growing at an estimated annual 10%-15% in value terms in recent years. But the growth has been concentrated in countries with large or majority Muslim populations in the Middle East and parts of Asia, with active participation from big foreign firms like HSBC Holdings and Citigroup. By contrast, places like New Zealand with small, fragmented Muslim populations have had a tougher time introducing Islamic financing products. Experts attribute this partly to low aggregate demand and partly to the knowledge gap between conventional financial institutions that have an incomplete grasp of Islam and Islamic scholars who know little about finance. ASB Bank, New Zealand’s largest mortgage lender, says it hasn’t had enough demand for Islamic mortgages. Muslims make up less than 1% of New Zealand’s population. Auckland-based conventional finance wholesaler Foundation Capital Markets conceived the Islamic mortgage product several years ago but was able to launch it only late last year because of the product’s unique needs. Al-Haramain is a broker for the product with three other conventional firms, Argosy Property Finance, Global Home Loans and Tasman Mortgages Ltd acting as mortgage managers. Foundation Capital says the initial interest in the product, called “manzil” or “home” in Arabic, has been robust. “We are already sitting on a number of approvals for a number of people that are hunting for homes,” said Prem Maan, Foundation Capital’s managing director. However, no one has yet taken out a mortgage because some clerics have raised questions about the product’s compliance with Shariah. Scholars spend decades studying the Qur’an and use their in-depth knowledge of Islam’s holy book to rule on whether a given product is acceptable or not under Shariah. Devout Muslims generally wait for this approval. Al-Haramain is the only firm linked with the manzil product to have a Shariah board. Under a manzil agreement, prospective home buyers put down a minimum 20% bond on their selected property with a trustee company paying the rest. The home buyer agrees on a fixed rent for 10 years and then has the right to purchase the property at the original cost, plus 10% of the increase in the house price in the intervening decade. That means a borrower who rents a house today worth NZ$400,000 ($313,000) will have to pay NZ$440,000 for the property if the value rises to NZ$800,000 in 10 years’ time. The agreement allows a customer to enjoy the same capital appreciation as a regular mortgagee. Manzil’s take-up is being hampered by soaring house prices – up around 40% in the last three years, according to the Real Estate Institute of New Zealand – which has pushed homes out of the reach for many. The rise in property prices has made the 20% bond a heftier burden, although Foundation Capital and its partners are working to reduce that to zero in coming months, said Maan. Other issues are more symptomatic of the difficulties of introducing new Shariah-compliant financial products anywhere: getting the details right so often-cautious Shariah experts are willing to approve the products. The seven-member Shariah board of the Federation of Islamic Associations of New Zealand (Fianz) has held back from giving its full backing to the product saying only that it a “viable alternative” to standard mortgages. A major cause of concern for the clerics is that there is no guarantee that funds used to buy the house aren’t earned from forbidden activities such as interest-bearing securities, or investments in gambling or alcohol-related businesses. Al-Haramain is talking to potential partners in the Middle East and elsewhere to find Shariah-compliant sources of funds while Foundation Capital says it will look for Middle East partners if the product takes off. Still, the development of the Shariah mortgage is a step in the right direction and could pave the way for the introduction of other Islamic financing products for both retail and corporate customers, say players. “If we get this off the ground, we could investigate doing Islamic commercial loans and things like that,” said Martin Fuller, managing director at Argosy. Foundation Capital is looking to create a sukuk, or Islamic bond, fund that will be offered to institutions in New Zealand and elsewhere while Al-Haramain hopes sought-after funds from Africa and the Middle East will allow it to extend business loans. “A lot of professionals here want to have something they can invest in perhaps for a few years and definitely (we need) some kind of fund that will allow people to borrow and use for import and export, a facility like a letter of credit,” said Mustafa Farouk, first vice president of Fianz. – (Dow Jones Newswires, 5 July 07)
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