Quote:Again I ask, how can it be such a good deal for lenders?  What criteria would be used to evaluate and determine risk and interest charges?  Would the default rate for a "sharia compliant" loan be an average of prevailing interest rates?  Would it be on the high end of the scale or the low end?

 

 

Fair questions.

 

It's a good deal for the lenders, because as I read it, the borrower would be on the hook for the entire amount of loan + reasonable interest (called a "fee").

 

Let's take the example of the 200k house.  Special Sharia rate:  20% down (40k), loan value of 312k.  Monthly payment = $1300.  If the borrower defaults 2 years in, the bank now owns a 200k house (or more, depending on appreciation) for 130k.  Banks hate owning houses, but at least they get their money back, as I imagine they'll get 150k for it by the time they pay a realtor and take their carrying costs.

 

If the borrower doesn't default, then it's really about the same as a conventional loan.  Bank gets their money, and from what I understand, they don't have to worry about losing a little bit if the borrower pays it back early.  There's no incentive to do so, since there's no interest to pay.  The borrower starts out "upside-down" on the property, while the bank is well above water.

 

As for the rate, that's usually dependent on the qualifying buyer.  I imagine because this is an exotic product, the lender would be able to charge the higher end of average.  Now, because banks compete for even these niche markets, that competition will keep the rates at least honest.

 

And to answer FSG's earlier question:  Banks right now don't have to offer any particular kind of loan to anyone.  In our free market, if Bank A doesn't want to offer, say, a 40 year loan, then Bank B or Bank C will to capture that market.  So it will be with the "Sharia" market.  There's no obligation to offer such products, it's just what the market will bear.  As for the product being unfair to the consumer, and consumers suing?  That one I don't know, but I'm pretty sure that's why they're discussing these things now instead of just rolling it out there.

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