Herald of Steel

According to the Islamic ruling, a bank can not raise the agreed price of a good even if the debtor is unable to pay back his loan.

Yes, the bank can sue him, they can take him to court, they might even repossess the house, car, land, etc. but at the end of the day, the agreed price is the agreed price, no matter what.

Nothing can change that- and there can be no late fees, no surcharge, no hidden costs.

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Everything has to be out in the open and agreed upon beforehand.

And if the homeowner is truly unable to pay… and asks for an extension, such as wanting to turn the 15 year mortgage he took into say 30 year mortgage, well then a whole new contract has to be drawn.

So in that case, the bank will first repossess the house, returning the homeowner all the money he has given them till that point.

The bank has to do this because when you were paying the installments, according to the Islamic rule, you were technically buying the ownership of the house bit by bit. So if it was a 30 year mortgage, each monthly payment got you a 0.28% stake of your house.

Thus if the bank wanted to repossess the home, it needed to ’buy back those shares’ first.

Now in this case, it was permissible for the bank to deduct some fixed sum as fines… but again, this number had to be decided all the way back when the man was signing the contract for buying the house.

Furthermore, it had to be a precise number like 10,000, 20,000, 100,000, etc.- it could not be a percentage of the deposited amount, as so many late fees are.

Only once the vast majority of the deposit was paid back and the bank bought back the house could they restart the negotiations for a mortgage extension.

And from this, we can easily see the third difference between a traditional and an Islamic mortgage.

If a traditional bank were to instead decide to retake the house, car, etc. they would simply seize them, taking all the deposited money as well as the resulting auction money for themselves.

Even if one paid your mortgage on time every single month for the last 20 years, but were somehow unable to complete the later payments, they lost both the house and two decades worth of investment, leaving them out on the streets.

Now, in some rare cases, they might get some amount back, but more often than not, this would be a paltry amount.

This was because although there were some laws that gave the homeowners a bit of protection against such bankruptcies, letting them technically get their deposits backs, in reality, all the banks had a work around the pesky inconvenience.

After all, giving so much of the money back would be damning for business, only fools would do it.

And the banks were no fools.

They were very smart, perhaps even the smartest in the world.

So they came up with a standard procedure called ’front loading’.

The way it worked is like this-

Suppose to take a 30 year mortgage with a monthly payment of 3,000 dollars.

For the first 15 years of that time- almost the full amount will go towards paying back just the interest owed on the house. The bank will perhaps set aside at most 100 dollars towards the actual purchase of the house.

Then for the next 10 years, this amount might get raised to 1,000 to 1,500 dollars. So about half of your deposit is meant for the purchase the house.

And it is only in last 5 years of the mortgage that the vast majority of the house is bought, once the bank has already doubled and tripled its money.

Thus unless you decided to pull out of the deal during the very last stretches of your mortgages, the banks could say you own very little of the house and thus get zilch.

In fact, if you start having problems around the 25 or more year mark, you can probably work out a deal with the bank …such as reduced monthly payments, or just paying the interest… because the bank has already made its money.

But anything below that… and you basically wasted your life’s work with absolutely nothing to show for it.

Alexander personally had no idea how any of this was legal.

No, he perfectly knew how it was- it was because the ones making the legistrations also owned those banks, or more likely, those banks owned them.

This is also why many Muslims who understood the maths tried to avoid mortgages, even if there were no such banks around them.

Of course it did not mean they bought the house outright- how many people in the world had an extra 300,000 to 500,000 dollars just laying around in cash?

No, what they would do instead is a group of them would come together to form a type of society, pooling their money together and then buying a house in that society’s name.

Then to decide who gets the house first, they would draw lots.

The procedure afterwards would just be like with an Islamic bank, the lucky man would buy the house from the society at a increased, but fixed price, and pay it back over a number of years.

While the rest of the member would once again raise money, addition those mortgage payments and in this way, slowly everyone in the group would get a house.

….

This was the explanation of how the two banking systems gave out financing loans.

Now what about the last type of loan- personal loans?

What happens if you needed money not for your business or to make a large purchase but for personal reasons such as education, medical, or even travel.

The Islamic banks could not make any profit here through dividends nor could they ask for an increased amount of money because this would mean interest.

In fact, it was even prohibited to commercially give money as a loan and then receive it back in cash.

And if someone did it, like a friend lending you some money, they could only receive the primary amount.

But for a bank, this net zero transaction was worthless- all the employees at the bank would starve if they started doing this.

So with these various strict restrictions in place, the Islamic banks had to get very creative.

And they at last found the answer by looking at the housing loans they gave out, taking inspiration from it to come up with a type of ’medium of exchange’ transaction.

The way it worked is like this-

Suppose you go to them asking for a 100,000 dollar student loan.

But they can’t give you the cash directly.

So the bank will instead offer to sell some kind of goods- it can be anything- grain, gold, steel, electronics whatever... that is worth 100,000 dollars.

But because you cannot pay for the goods in cash, you wish to pay in installments over a long period of time, they will ask for an higher amount, with the exact terms depending on the individual circumstances.

Suppose they ask a price of 125,000 dollars for a 5 year installment.

You agree and then sign all the documents.

Once that is done, and the price is set, then that is it.

Just like with the mortgage example, there is no way the agreed price can be changed.

Even if you miss a few months of payment, the bank cannot ask for a penny more.

They might sue, take you to court, and do everything within the law, but the price will remain the same.

As for what happens to the product you got…

Well, you bought it, it is legally yours…so you can do whatever you want.

But most likely, because you need cash, you will go sell it on the second hand market, for whatever price you can get.

Sometimes, if you do not know any such broker, which is most likely the case, the bank itself will offer to buy the goods it just sold back from you for the market price- 100,000 dollars in cash.

Or if you think you know better, you can take the goods to a more suitable customer thinking you might be able to get more than 100,000 dollars.

Whichever the case, the money you get from that sale is the fund for your loan.

So in simpler terms, whereas a traditional bank will give you 100,000 dollars and make…let’s say 25,000 extra on a 5% interest rate over 5 years, an Islamic bank will sell you 100,000 dollars worth of goods, and ask for an fixed return of 125,000 with no hidden costs.

The caveat in the latter case was you also had a chance to make money, such as if the price of the commodity suddenly increased right after the day you got the goods, and vice versa, lose money if the price suddenly fell.

Thus once again we get this idea of uncertainty and the possibility of profit and loss with the Islamic banks.

Nothing in business is guaranteed.

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