Will Islamic mortgage become a worthy alternative to market mortgage?
The experiment implemented in Tatarstan is proposed to be extended across Russia
Islamic mortgages can become a solution to the problem of prohibitive rates on market mortgages — this is the conclusion drawn by financial analyst and economist Alexander Razuvayev proposing to extend the experiment across Russia. Currently, the Islamic banking pilot is being implemented only in four regions of the country, including Tatarstan. However, despite the advantages in the form of no interest and penalties, most of the surveyed specialists still doubt that this type of mortgage lending will be more profitable than standard ones and will be in great demand.
There is a way out — Islamic banking
Most Russians, almost 80%, decided to postpone buying a home due to prohibitive rates on market mortgages, according to a survey by Frank RG. The average cost of a mortgage loan in the country has already reached 30.17% among the main market participants. Therefore, citizens risk paying seven times more on a mortgage than the cost of the apartment, CIAN calculated.
The reason is the sharp increase in the Central Bank's key rate, due to which the overpayment on market mortgages has increased 2.5 times over the year. Therefore, in the case of a long-term loan, the borrower will have to pay many times more than the cost of housing. Analysts have found that the sum of all payments with the initial payment will almost three times exceed the cost of housing both in a new building and on the existing market.
Meanwhile, according to other studies, about 78% of citizens are still interested in buying real estate. In the absence of mass preferential mortgages and the inaccessibility of market ones, they are advised to take a closer look at other mortgage lending products. For example, investment analyst and economist Alexander Razuvayev believes that Islamic mortgages can be a worthy alternative.
Since last September, a two-year experiment on the development of Islamic banking has been implemented in the above-mentioned regions of the country. Banks have received the opportunity to offer clients new products for housing loans.
Should Islamic mortgages be extended to all of Russia?
Alexander Razuvayev clarified that Islamic mortgages are instalments in which three parties interact: the client chooses housing and submits an application, the bank checks its solvency, the mortgage partner buys the apartment and sells it to the client in instalments with a mark-up. The size of the mark-up will depend on the term of the contract, the size of the down payment and other parameters. At the same time, Islamic mortgages have their advantages.
“First, there is no penalty for late payment. According to Sharia rules, it is forbidden to profit from debt, so penalties for late payment will not be charged. You must pay as much as specified in the purchase and sale agreement. Second, there is no insurance, related products: the client does not take out life or home insurance,” the analyst noted and added, “Maybe it is worth spreading Islamic mortgages across Russia. You do not need to convert to Islam for this. When you buy halal dumplings, you do not convert to Islam. You just know that there is no pork in them, and there is no interest in Islamic mortgages.”
According to him, the experience of Islamic financing should be transferred to other regions. “Of course it is possible, even necessary. This is a way out of the current situation,” he emphasised. According to Sharia rules, instead of a loan with interest, banks offer instalments, asset trust management, and halal investments. There are three types of Islamic mortgages:
- Ijara is lease with subsequent redemption, in which the lender annually revises the rent, agreeing with market prices, and the borrower can buy the apartment at any time at book value.
- Murabaha is a product common in our country, when the lender buys the apartment and sells it to the buyer at a higher price and in shares. The amount of the mark-up is specified in the contract, and the terms can be revised with the consent of all parties.
- Musharaka is joint ownership of real estate by the lender and the client, in which the bank leases its share to the borrower, and the latter buys it in parts.
The terms of market and Islamic mortgages differ significantly, and at first glance, the latter looks cheaper. Realnoe Vremya’s correspondent contacted Sberbank and Ak Bars Bank posing as a client with a request to calculate the cost of purchasing a one-room apartment in Kazan. Judging by the creditors' calculations, the transaction under Sharia law looks significantly more suitable than standard lending. However, in the Tatarstan bank, you can only take out an Islamic mortgage for an apartment on the existing market, as well as a house with a plot. In Sberbank, on the contrary, you can buy both new and second-hand housing, with the exception of individual housing construction.
“Islamic mortgages have many advantages, but it is difficult to distribute”
Editor-in-chief of InVoice Media, analyst Denis Mirolyubov also talks about the advantages of Islamic mortgages. “Many people are afraid of everything unknown — at first, digitalisation seemed like something scary, and now Islamic banking, which is even called a product of Western intelligence agencies. In fact, everything is very simple and safe,” the interlocutor noted.
According to him, the key point of Islamic banking is to attract money from the Persian Gulf countries to project financing. In addition, Islamic banking can help Russia bypass sanctions, an example of which is Iran.
At the same time, the total cost of the loan is usually higher than traditional ones, he noted. In addition, according to him, Islamic mortgages involve a stricter approach to property valuation, since the bank wants to minimise risks. Therefore, “this instrument is unlikely to become a full-fledged alternative, since Islamic mortgages do not apply to preferential programs in Russia.” Plus, he added, not all banks will allow the use of maternity capital, and the choice of real estate under this programme is small.
“Islamic mortgages have many advantages — there are no penalties for overdue payment, no interest, monthly payments are lower than traditional ones. But it is difficult to extend it to all of Russia. Not all banks have joined this programme yet, and it is unlikely that this process will mythically quickly become active,” Denis Mirolyubov believes.
Islamic mortgages do not provide significant cost reduction
Other housing market experts interviewed by Realnoe Vremya also express doubts that borrowers can save money by choosing not standard lending, but an Islamic banking product. For example, in the Kazan real estate agency Portal-116, where one of the first transactions within Islamic mortgages was conducted, they said that there is still little demand for it.
Head of the Quartet Real Estate Agency Ruslan Safin believes that in reality, Islamic mortgages will cost more than the market:
For this reason, Islamic mortgages do not provide a significant reduction in the cost of buying housing, which means that there will be no serious redistribution of the real estate market due to this product, the expert is convinced. In addition, according to him, there will also be few borrowers who want to use it. If these are not Muslims, but representatives of other faiths, such a product is unlikely to attract them.
“The issue is ambiguous”
In turn, economist, CEO of the analytical agency BusinessDrom Pavel Samiyev believes that it will be difficult to assess the potential for the spread of this mortgage format. At the same time, he believes that it is better to call such a product not an Islamic mortgage, but a partnership mortgage, as in the case of partnership financing:
The first question, according to him, is related to how banks will evaluate this model from an economic point of view. For market mortgages, the interest rate is on average about 30%, respectively but the full cost of the loan will be calculated in the region of 34-35%. “Why is that? Because the product also includes various other additional fees, which essentially increased this rate. And here it turns out that within the framework of a partnership or Islamic mortgage, these stories are removed, and this is good for the client, this is correct. But the bank may consider that this product is not very interesting for it economically and is not worth developing,” Samiyev explained.
The second question is related to the risks of late payments. It is assumed that the borrower will eventually eliminate the debt and still fulfil his or her obligations. “The lender will not take any penalties, will not charge penalties. This is also good for the borrower, but this tool works when both parties do everything without any special mechanism for ensuring all these procedures and minimising risks. And if it cannot be organized this way? If the borrower still violates the terms? Then the bank has fewer opportunities to force him to fulfil his or her obligations," the expert noted. Therefore, the issue of the advantages of Islamic mortgages, in his opinion, is ambiguous.