On the money

Islamic law prohibits the payment of interest on loans, making conventional mortgages incompatible with religious principles. So a number of registered social landlords are working on ways to make shared ownership and key worker schemes that are suitable for Muslims (HT 1 October, page 14).

There is no problem under Islamic law with shared ownership per se. In fact, there are a number of alternative finance methods that are acceptable to Muslims and one of these is essentially a shared ownership scheme. For instance, rather than grant a loan and charge interest, the bank buys the property and leases it to the customer until sufficient rent has been paid to cover the buying price plus a profit.

The thing that creates difficulties with shared ownership is the tenant’s need for finance. With Islamic finance, the funder will normally need to own an interest in the home, which would complicate a shared-ownership arrangement.

A major obstacle in the past was that these transactions gave rise to two stamp duty charges. However, a specific exemption was included in the Finance Act 2003 and an increasing number of competitively priced Islamic house finance products are becoming available. This demonstrates there is now a political will to remove financial disadvantages previously suffered by Muslims.

The products launched so far have been targeted at customers who do not need additional financial assistance, though, and so do not suit shared-ownership purchases.

There are a number of ways in which shared ownership could be adapted for Muslims. One might be an Islamic bank providing finance to an RSL; the RSL then grants a shared-ownership lease in the usual way but retaining a much higher level of initial ownership, perhaps 95%.

The thing that creates difficulties with shared ownership for Muslims is the need for finance

The finance raised by the RSL may not need to be Islamic finance as the tenant is not directly involved in this arrangement, although knowing that the ultimate source of funding is also acceptable for Islam may help to make the whole arrangement more attractive to potential buyers. Another option may be for the RSL to grant a head lease to an Islamic bank, which then sublets to the shared ownership tenant.

Shared ownership would not necessarily need to involve any additional source of finance if the RSL had sufficient resources to be able to hold a 90-95% share of the equity on its own balance sheet.

Schemes for key worker housing, which currently assume that the key worker will be able to raise a mortgage on the property, also need to take into account Muslims’ needs.

The concept of the equity mortgage, by which the government seeks to provide top-up funding, is very close to Islamic principles. It may be that this concept could be developed to provide the majority of the funding.

One last problem is that the discounted purchase price under the right to buy legislation only applies where the tenant purchases the property from the council, so does not allow for Islamic models where it is the bank which buys the property. The ODPM has, however, said it will introduce amendments to address this.