GLO Part 2: Buy a house without paying interest: lessons in Islamic finance

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University of Sharjah

As a continuation of our previous blog on Tippie’s Global Learning Opportunity (GLO) trip to Dubai, the second part of our week-long trip took us to the neighboring emirate of Sharjah.  The government of the United Arab Emirates is a federation of seven constitutional monarchies known as emirates, like the United States’ system of a federal government with separate state governments.

Sharjah, just northeast of Dubai along the Persian Gulf is an emirate that’s differentiated itself as education-focused.  Rather than dedicating resources to tourism and trade, Sharjah’s leader (and holder of multiple PhDs) Sheikh Sultan bin Mohammed Al-Qasimi III has earmarked much of Sharjah’s resources to furthering education in the UAE and the region.  Under Sheikh Sultan’s guidance, Sharjah has developed Sharjah University City, a massive campus that includes a number of educational institutions, including one that our group visited: the American University of Sharjah.

AUS is an undergrad and graduate institution that teaches in English and draws students from around the globe.  We met with Professor Abdelaziz Chazi, an expert in Islamic finance, a system of finance that is consistent with Shar’iah (Islamic) law.

Professor Chazi explained that Islamic law is based on a philosophy that commercial transactions shouldn’t carry too much or too little speculative risk to comply with Islamic law.  Riskless transactions could be viewed as one party taking unfair advantage of the other, and high risk speculative transactions may encourage uncertainty and fraud.  The concept of interest (usury) is forbidden in part due to its riskless nature other than default risk.

Students pictured: Brent Wells, Justin Bishop, Michael Thompson, Ryan Jennings and Stacy McMullen

Despite the seeming impossibility of buying a house without paying interest on a mortgage, there are ways for Muslims to comply with their religion while still engaging in buying a home or doing business.  For example, a home mortgage can be redesigned so that the homebuyer picks the house, the bank purchases the home, and the bank then resells the home to the homebuyer over time, at a premium which would roughly reflect the prevailing mortgage rate.  As the homebuyer pays off the bank, their equity increases, yielding a similar result as a conventional home mortgage, albeit in a manner that does not include the payment of religiously-prohibited interest.

Islamic law also prohibits buying stocks of companies that are in certain industries such as gambling, alcohol, pork and pornography, and also requires that one’s stock holdings include companies that maintain minimal amounts of debt, cash and accounts receivable.  Too much debt entails excessive risk.  Too much cash means that the company is hoarding cash and not giving back to the community.  Too much accounts receivable means that the company is overly reliant upon future payments from customers.

Interestingly, though based upon religious concepts rather than pure profit-making motives, the Dow Jones Islamic Market Index has outperformed the Dow Jones Industrial Average over the past ten years, up nearly 90% as compared to the Dow Jones’ 54% increase.

The final part of our trip takes us to Abu Dhabi, the largest and the most oil-rich of the emirates.  As we will discuss in the final installment of our Dubai GLO blog series, Abu Dhabi is helping lead the way for the United Arab Emirates to diversify its economy to prepare for the challenges of an increasing competitive and globalized world.

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