Islamic loans not interest-free loans

A Muslim woman’s call for Muslim-friendly home loans sparked a lot of outrage over the weekend.

Islam teaches that interest is evil, and many Muslims try to avoid situations where they earn or pay interest – including traditional loans and investments. But it’s not completely impossible for Muslims to borrow or invest: “Islamic banking” is a fast-growing sector of the finance industry, offering saving and borrowing opportunities that compensate for risk via a slightly different approach.

Unfortunately Radio NZ failed to communicate any of that in their article intro:

An Auckland woman is rallying banks around the country to provide interest-free mortgages to Muslims looking to buy their first home.

Of course that left people who didn’t read the article thinking that Muslims are asking for free loans, which isn’t the case at all. The rest of the article is informative and neutral, but really, Radio NZ? Was it necessary to be so deliberately inflammatory?

How Islamic loans really work, according to the article:

In 2006, several small-time firms began answering the call, offering home loans with a set profit margin for the bank without a fluctuating interest rate.

That’s it. We agree in advance that I borrow $100 now and pay you $105 next year. No magic, and definitely not a free loan.

I’d be interested to see numbers on the profit margins of these loans compared with traditional loans over time. My expectation would be that banks ramp up their margin in advance to compensate for their inability to change it during the life of the loan, meaning Muslim borrowers may end up paying more.