How to finance housing in Islamic economies

Financial markets in Islamic countries face large challenges, as the law prohibits, in principle, interest. Lenders and creditors need to go through all sorts of hoops to find a legal way to allow for something that is interest in spirit but not in fact. One consequence of these hurdles is that the mortgage market is almost non-existent, and this has translated into an absolutely desolate residential stock in many Islamic countries. Clearly, improving the lives of people goes through an proper and active mortgage market. How could this be achieved in an economically and legally reasonable way?

Zubair Hasan claims to have solved this problem. The current practice is to sell the house to a bank and then buy it back with a mark-up added. This margin corresponds of course to interest, but this practice seems very controversial in case of default, as banks insist on full payment of the debt disregarding any installments already paid. This trouble arises because of the ownership structure and this is why the idea is to propose joint ownership between the "landlord" and the bank. The latter gets gradually reimbursed for the amount of the debt and also receives rent for the share of the house it owns. This solution boils down to the same outcome as for a classic, western mortgage. The trouble is that it involves three separate contracts (joint ownership, lease and buyback), and Islamic law prohibits making a contract conditional on another one. This is very constraining.

Hasan's idea is to replace the full ownership of a share of the house by the bank by a constructive ownership, much like a stock broker possesses the stocks his clients really own. The author thinks, without being certain, that this should satisfy Islamic law. But what this highlights is that Islamic law seems to put absurd hurdles on economic activity and that, maybe, it could be adapted to modern circumstances.