Sharia-Compliant Loans to Muslim Customers
Islamic law prohibits paying interest on loans. There are many fine distinctions beyond the scope of this blog. However, if a Muslim customer needs a traditional mortgage loan, there is a structure you can use that has received regulatory approval. In what is known as Murabaha transaction, the borrower sells its real estate to you for a price (the loan amount) payable at closing and you immediately sell the property back to the borrower for a price payable in installments. The installments are principal plus a “profit” payable to the lender. The profit percentage is equal to the interest rate. The lender treats the transaction as a loan for all purposes. Both the OCC and the NYS DFS have issued guidance approving this structure. The New York City Department of Finance issued a memo that no transfer tax is payable on the extra property transfers (from borrower to lender and back).
Today’s Takeaway? Yes, you can make loans to Muslim customers that satisfy their religious obligations without violating regulatory or tax requirements, BUT it requires a custom document package which, among other things, replaces the promissory note with a purchase and repurchase agreement. You then get a mortgage to secure the payment of the repurchase price.
Jay L. Hack is available at firstname.lastname@example.org.