Herald of Steel

Chapter 1444: Two Types of Bank (Part-3)

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.

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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