Islamic Finance and Housing Projects in Malaysia
I just read about this interesting new practice in housing developments in Malaysia that is based in Islamic finance, and the historic credit sale permissibility tied thereto. For those unaware, Islamic law has always permitted credit sales (I sell you X now, and you agree to pay me over time), which makes for an easy interest evasion. At times, the contortions to achieve this are amusing, particularly for a practice that spends so much time defending a ban on interest as furtherance of a principle of profit and loss sharing.
Take this Malaysian example. You have housing developers in Malaysia, and they're seeking to sell the property in advance, as yet undeveloped. So normally what one does to evade interest in Islamic finance (or one way to do it, in any event) with completed property is for the bank to buy the property, immediately sell it to the purchaser at credit sale at a markup, or to use a form of rent to own, where the purchaser pays a lease price (corresponding to the interest payment), along with the purchase of an ownership stake that grows over time (corresponding to the principal payment). Yet the problem with this approach in this context is that legal regulators don't much like the idea of banks having some sort of interest in undeveloped property, which is risky, and so the relevant regulatory rules require the purchase and sale, from developer to final purchaser, to be on the books first, and then one can go get a loan for the money from the Islamic bank.
But of course interest bearing loans aren't allowed, so what to do? Follow closely now. Developer sells it to the person who is ultimately going to purchase it,for a given price, which the purchaser has yet to pay. The purchaser, instead of getting a loan, sells the interest immediately to the Islamic bank, which meets necessary regulatory requirements it seems if the bank then immediately sells it back to him at a higher price (bay al ina it's called, sale and repurchase of the same item at markup, controversial in many areas of the Muslims world) which is then paid over time, with the Bank retaining a security interest throughout. So the sale was already on the books, and then the "loan" through sale and repurchase. Several problems.
Did the purchaser, when selling the property in the first place, even own the damn thing? It isn't in existence (property hasn't been developed yet), which is one problem under speculation prohibitions, but aside from that, the purchaser hasn't paid for it beyond an initial deposit and as such the seller isn't putting the buyer's name on the title until the seller gets its cash which only happens after the purchaser sells the property to the bank for cash, to give to the developer. So the purchaser is selling something to the bank and then buying it back, in circumstances where it's not even clear the purchaser owns it. Certainly it has no legal title, no seller in their right mind would ever concede that.
Then there's the even weirder part that the bank doesn't even agree to this purchase and sale bit, given that it's buying it from a purchaser who sort of doesn't own it and certainly hasn't paid for it, unless it can take a security interest in the property as against the seller upon purchase. That way, if anything happens, it can always foreclose. But it buys and then sells the damn property to the samy guy. You cannot take out security on something you just bought, it makes no sense. If you don't pay, do you foreclose on yourself?
So a purchaser who might not own something sells it to a bank who claims it does and then takes a security interest in it, to sell it back to the person who still might not own it but has money for it now to pay a developer who then gives him ownership of property he's bought and sold, which, again, has had a lien taken out by someone who owned it when they took out the lien.
Friends, seriously. Stop. Just stop. Take out an interest bearing loan and be done with it. Honestly.