Non - bank Financial Intermediation 209
SPECIALIZED SECTOR FINANCE COMPANIES
Specialized sector fi nance companies include those catering to home and
consumer fi nancing demands using ijarah (leasing) and murabahah (cost -
plus fi nancing) contracts, or those providing working capital to industrial
or agriculture sectors. The most common types are mortgage, mudarabah,
and leasing companies.
Islamic Mortgage Companies
Islamic mortgages made news in the US in 2001, when government -
sponsored home-mortgage giant Freddie Mac agreed to underwrite and
securitize Islamic mortgages. In 2007, Freddie Mac bought over US$250
million in Islamic mortgages.^1 Given the growth and demand for Islamic
mortgages and the booming real estate market in the US, several com-
mercial banks such as Devon Bank and University Bank started to offer
Islamic mortgages. The chances of success for the Islamic mortgage industry
are bright in Western markets, where capital markets are relatively liquid,
transparent, and regulated. In particular, there is great potential in North
America, where there is a sizeable Muslim community in middle - and upper -
class income brackets.
Islamic mortgage companies provide home buyers with Shari’ah -
compliant options to purchase property. They typically target Muslim
communities in Western countries with developed conventional mortgage
markets, such as Canada, the United Kingdom and the United States. There
are four models of Islamic mortgage currently in practice, as follows:
Lease to Own The fi rst model is based on the ijarah wa “qtinah” (lease to own)
contract, in which the mortgage company purchases the desired property
from the builder or existing owner, rents or leases it to the home buyer for
a specifi ed period of time, and ultimately sells it to the home buyer for a
predetermined residual value. This model is the closest to the structure of
a conventional mortgage.
Cost Plus Mark - up The second model is based on the murabahah contract, in
which the bank purchases the desired property from the builder or owner,
and immediately sells it to the new home buyer at cost plus a predetermined
profi t. The buyer and the bank enter into an agreement where the buyer
agrees to pay the fi nanced amount over a predetermined period in pre -
agreed installments. While, on the surface, this form of Islamic mortgage
is similar to a conventional fi xed-rate mortgage, there are some differences
with respect to insurance obligations and in the way installment payments
are treated for tax purposes. Murabahah mortgages are commonly prac-
ticed in the UK because until 2003 Islamic mortgages based on lease or
equity partnerships were subject to double property-transfer tax laws.